FAQ: Home Buying Process

How do I begin negotiations to buy a home?

Negotiations are handled in various ways in different parts of the country. Typically, most transactions begin with negotiation over price, although other items such as date of possession may also be negotiated. The real estate agent will provide a form, usually called a contract to purchase or, simply, a real estate contract. In any case, this is a formal, written offer that conveys your terms to the seller. If you intend to have the home inspected, it should include an inspection rider; if you intend to apply for a mortgage, it should include a mortgage-contingency clause; if your attorney has not reviewed the contract, it should include an attorney-approval rider. In other words, it should cover the basics. Remember, once both parties sign this document, it is legally binding.

The offer should specify a date after which it is no longer valid. This may be as little as 24 hours from the time the seller or the seller's agent receives it. The offer to purchase also is usually valid only if both the buyer and seller sign it within a certain time period. As a general rule, an earnest money deposit accompanies the offer to purchase. Often this is the start of negotiations. The offer to purchase may be passed back and forth between the buyer and seller before being accepted by both. Remember, however, that both parties must initial any changes agreed to during negotiations. Once you have agreed on terms, you will want to arrange for a home inspection and review the document with your attorney if, as noted above, you included these riders in your offer. In most cases, you will not want to apply for financing until the home inspection is completed and satisfactory. In some areas, the purchase contract will include all provisions of the transaction; in other areas, another document will be drawn up by the buyer or the seller that covers such items as conveyance of title, provision for insurance, etc. In either case, you will want your attorney to make sure that the final document covers all aspects of the sale.

Who is involved in a real estate transaction?

Although it's possible for a home to be bought and sold strictly between principals the buyer and seller this rarely happens today. Usually, a homebuyer will want to use the services of a real estate agent, an attorney, and a home inspector to check out the property. To obtain financing, homebuyers will consult the staff of one or more lending institutions. They also may consult with a financial planner or accountant about financing and an insurance agent to obtain homeowner's insurance.

While some sellers choose to sell their home without the services of a real estate agent, few would forego the services of an attorney once a purchase offer has been made. The seller also may turn to a financial planner or accountant for assistance in sorting out the tax consequences of selling.

What is the purchase contract?

The purchase contract may be called a sales contract, real estate contract, purchase agreement, sales agreement, or purchase and sale agreement. Whatever it is called, it is a legal document that, when signed by both parties, is a legal contract that will govern the entire transaction. Before signing such a contract, you will want to review it carefully and have your attorney review it. Remember, once signed, you are obligated to fulfill your part of the contract.

What is a mortgage contingency?

This common provision allows the buyer a certain period of time to obtain a commitment for financing at a specified interest rate for a certain amount of money. The clause might read, for example, that the contract is contingent on the buyer obtaining approval for a 30-year mortgage for $300,000 at no more than six percent interest within 30 days. For additional protection, the buyer might specify the type of loan he or she prefers, for example fixed or variable.

A mortgage-contingency rider provides critical protection to the buyer. For example, it allows the buyer to void the purchase contract without penalty in those cases in which the buyer is unable to obtain financing on the terms specified in the contract after making a reasonable or good faith effort to do so within the time provided. Because this type of clause favors the buyer, some real estate agents suggest that the buyer obtain "pre-qualification" from a lender, which gives the seller a degree of confidence that the buyer will not use the clause to void the contract unless some extraordinary circumstance arises.

The seller may refuse to agree to a mortgage contingency. This can and does happen in a very hot seller's market, in which case, there is not much the buyer can do. But the absence of a mortgage contingency might mean that the buyer will be forced to finance his or her home purchase at an unfavorable interest rate. Because of this risk, buyers should be cautious about signing a purchase contract that does not contain this clause.

What does an inspection contingency provide?

The inspection contingency is a very important safeguard for the buyer. Two types are commonly used. The first gives the buyer the right to have the property inspected by a professional home inspector of the buyer's choice and at the buyer's expense. If the inspector finds defects, the buyer has the right to cancel the contract within a specified time. Thus, it can give buyers a few extra days to decide whether they want to follow through with the purchase.

The inspection contingency may also give the seller time to either repair any problems uncovered by the inspection or agree to reduce the selling price contained in the contract by the cost of repairs. If a seller opts to do nothing, he or she must inform the buyer. Unless the buyer and seller can come to terms based on the buyer's inspection report, the buyer can cancel the contract and seek return of any earnest money previously paid.

What is "earnest money" or a “good faith deposit”?

When the buyer signs the offer to purchase, the buyer usually deposits a sum of money with the seller, the seller's real estate agent, or the escrow company. Earnest money is not the same thing as the buyer's down payment although, if the sale goes through, it will be applied to the down payment. Earnest money symbolizes the buyer's commitment to take the necessary steps to complete the purchase, for example obtaining a loan.

Thus, if a prospective buyer does little or nothing to complete the sale, he or she risks losing the earnest money deposit.