Making an offer on a house and signing a purchase contract is a legally binding agreement. If you put earnest money down on the home, you stand to lose it if you back out of the contract, unless you have contingencies on the contract. Because of this, there are some things you should know before you put your bid on a home.
Make sure you check out the neighborhood.
When you buy a home, you are buying into a neighborhood. So don’t make the mistake of just checking out the house. Take a walk and drive through the area as often as you can. Try to switch up the days and times that you visit the neighborhood too. Choose weekday mornings, weeknights, weekend afternoons, and weekend evenings. This way you’ll know what the area is like during different times. Is the noise level tolerable? Are the neighbors respectful of one another? Is it a close-knit community? These are the things you’ll want to figure out before you put in an offer.
Ask about the utilities.
This is especially important if it’s your first home. You might be a little shell shocked when you see the cost of the utilities, especially if you didn’t pay for these while renting. You can ask the seller the average cost of their utilities. You can also call the utility companies for a fair estimate of what you should expect. You’ll have to figure this amount into your monthly budget, so it’s worth investigating to make sure it won’t put you over budget.
Know the comparable sales in the area.
The offer you make should be one that is in line with the comparable sales in the area. These are homes that sold within the last six months and are similar in size and stature to the home you want to buy. These are the homes that the appraiser will likely use to determine the fair market value of the home.
If you bid too high, you might lose your financing because the home won’t be worth your bid. If you bid too low, you stand to lose the bid to someone that bids higher. Knowing the amount of the recent sales in the area will help you get on the right track with your bid, increasing your chance of the seller accepting it and the lender approving your loan-to-value ratio.
Don’t forget about closing costs.
As you figure out how much you can spend on a home, don’t forget you need cash for the closing costs. They can total between 3% and 5% of your loan amount. On a $200,000 loan, that could mean up to $10,000. Don’t make the mistake of putting all of your cash down on the home and not leaving anything for the closing costs. While there are ways to get the lender or seller to help you with the costs, this doesn’t always work out.
When you prepare your offer, keep in mind that you will need the money to cover those closing costs. This may help you keep your wits about you as you search for a home. It’s very easy to get caught up in the excitement, putting an offer on a home that you truly can’t afford in the long run. When you know everything that is at stake, though, you can make a more informed decision.
Make sure you understand what contingencies you need.
When you complete the purchase contract, you agree to buy the home for a specific price and by a specific date. If you don’t include any contingencies in the contract, you don’t have a way to back out of it without losing your earnest money.
Contingencies make the contract contingent on specific events. The most common things are:
- The home appraisal – You need the home to appraise for at least the amount you bid on it.
- The home inspection – You should make sure the home is in good condition and there aren’t any serious problems that you cannot see.
- The sale of your home – If you have a home to sell, you may not want to own two homes at once. This contingency gives you the chance to sell it by a specific date or you can back out of the purchase contract.
If any of these things happen, you may be able to back out of the contract, get your earnest money back, and start all over again on another home.
Know how soon you want to close on the home.
As a part of the purchase contract, you will have to choose a closing date. This is something you and the seller must agree on. Thinking about it ahead of time can give you time to truly think. Can you close fast – such as in 30 days? Do you need more time to sell your own home? These are things you should consider so that you can figure out between you and the seller the best closing date. If you miss this date, you could void the contract and lose your earnest money, which isn’t something you want to happen.
Get pre-approved for a loan first.
Before you even step foot out in the housing market, you should get yourself pre-approved for a loan. This way you know how much you can afford. It also lets sellers know that you are a serious buyer. If you just come walking through the home but don’t have anything stating that a lender is willing to loan you money, a seller will have a hard time taking you seriously.
The preapproval is like the ‘ticket’ into the home. It shows the lender that you are an interested buyer and that you have the ability to secure financing should you win the bid on the home.
Making an offer on a house is exciting, but it’s also very intimidating. Knowing that you have all of your ducks in a row before you make the leap is essential. This way you know you are covered financially, whether you do buy the home or you need to back out of the contract.