First-Time Home Buyer Guide: Submitting the Offer
Ready to buy your first home? Check out our ultimate first-time home buyer guide so you can move through the home-buying process like a pro.
As a first-time home buyer, the buying process can feel overwhelming. But as complex as it may seem, all home purchases follow the same simple process. Once you understand that progression on a basic level, you’ll be well-equipped (and less anxious) when it’s your turn to buy.
In this three-part first-time home buyer guide, we’ll demystify the buying process so you can navigate each step with confidence.
In Part One (“House Shopping 101”), we walked through the initial stages of buying a home, from getting pre-approved for a mortgage to establishing a relationship with a realtor and finding the “perfect enough” home.
Now, we’ll walk you through how to submit and negotiate your offer and what to expect once you have an accepted purchase agreement.
Making the Offer
Once you’ve identified a house you’re ready to call home, it’s time to make an offer.
Your realtor may complete a CMA, or Comparative Market Analysis, on the property to determine the appropriate market value. This is a good idea to complete before making an offer to ensure the property is worth your purchase price.
Listing prices can escalate in crazy competitive markets. Ultimately, you don’t want to pay more than a property is worth. The goal is maximizing your equity.
A Crash Course on Home Equity
Debt vs Equity
Before we dive into the meat of the first-time home buyer guide, I’m going to break down the difference between debt and equity.
Let’s start with debt.
Debt is money you borrow and pay back over a set period. When you buy a home by taking out a mortgage, that means that you’re borrowing money from a financial lender to purchase the property. The property secures the debt, so if you don’t pay as agreed, the lender can repossess the property.
After closing, you will repay that lender through principal payments. The cost of borrowing that money is called interest. You can think of your monthly mortgage payment in three parts.
- Interest: Cost of borrowing
- Principal: Repayment of borrowed money
- Escrow: Taxes and insurance payments
Now, let’s move on to equity. Equity is the portion of your home that you own outright. If you pay the entire purchase price out of pocket, you have 100% equity in your property. If you take out a mortgage to buy a home, your equity is the difference between the current market value of your home and the outstanding balance on your mortgage.
So, as you repay the money you borrowed, you are building equity.
Standard Offer Form
If you’re working with a realtor, he or she will likely have a standard offer form for you to fill out and will guide you through completing it.
It will include all of the pertinent details about your offer, including the purchase price, any earnest money deposit that you may be making, what contingencies are included in your offer, and other terms of the sale.
Earnest Money Deposit
An earnest money deposit is a deposit made by a buyer to show that they’re serious about an offer on a property. The earnest money is usually held in escrow until closing. Then, it’s applied to the purchase price of the home.
If the deal falls through for any reason, the earnest money is typically returned to the buyer. In some cases, the earnest money may be forfeited if the buyer backs out for reasons that are not outlined in the contract.
For example, if a buyer makes an earnest money deposit and then decides to purchase a different property instead, they may forfeit their earnest money deposit. Make sure you are ready to commit to a purchase before making a deposit.
RELATED POST: The Actual Cost of Homeownership: 8 Hidden Expenses You Need to Know
Contingencies
Contingencies are important because they protect the buyer and the seller in a real estate transaction and ensure both parties are aligned on the conditions of the purchase agreement. They are negotiated as part of the purchase agreement, and can be customized to fit the needs of both the buyer and the seller.
For example, a contingency might state that the home sale depends on the buyer obtaining financing within a negotiated time period or upon the property passing a home inspection.
Contingencies provide a safety net for both parties and can help to prevent buyers from defaulting on their purchase agreement or sellers from being stuck with a property that needs repairs.
Negotiating Strategies
Once you’ve signed the offer form, your realtor will submit it to the seller’s agent.
The seller can choose to accept your offer as-is, reject it outright, or make a counteroffer. If they choose to counteroffer, this is where the negotiation process begins.
It’s important to remember that there is usually some wiggle room in any offer. A seller’s market may require home buyers to start high. Why? Because sellers have more leverage when the demand for houses is higher than the supply. If there are multiple competitive offers on the table, you need to be prepared to move quickly and make your best offer up front.
On the other hand, when housing inventory exceeds the demand, the negotiation strategy favors the buyer. Instead of multiple buyers competing for the same house, sellers are now competing for the same buyer. Buyers can take their time, study the market and size their offer based on the market value of the home and comparable sales in the area.
If you and the seller can come to an agreement on the purchase price and other terms of the sale, the next step is going into escrow. This is where all of the paperwork related to the sale is finalized and everything is put into writing.
You’re Under Contract!
Once you’re in escrow, there are several important milestones that need to be completed. The first is typically the home inspection (unless the home inspection contingency was waived in the purchase agreement).
Home Inspection
A home inspection helps ensure that the home is structurally sound and free of any major defects. It can also provide you with peace of mind as a buyer, knowing that you are making a sound investment.
A typical home inspection will cover the condition of the home’s foundation, windows, doors, roof, gutters, and plumbing. The inspector will also check for any signs of water damage, mold, or pests.
The inspection report will provide you with an estimate of the remaining life expectancy of major systems and appliances. With this information in hand, you can make an informed decision about whether to purchase a home.
In addition to an inspection, your lender is likely to require an appraisal.
Home Appraisal
A home appraisal is a professional opinion of a home’s value. It is typically ordered by a lender when a borrower applies for a mortgage. The appraiser will visit the property, take photos, and compile information about the home’s features, size, and location. This information will be used to compare the home to similar properties recently sold in the area.
The appraiser will also consider factors like the current real estate market and property conditions. The final appraised value will determine how much money the lender will lend you.
Appraisals are an important part of the mortgage process because they protect both lenders and borrowers from overpaying for a property.
Is there any reason to get an appraisal if you won’t be financing your home purchase?
In short, yes.
It’s always a good idea to have an appraisal done before purchasing a home, even with no mortgage. An appraisal can be helpful in negotiating the purchase price, as well as in understanding how much equity you have in the home.
If the appraised value comes in lower than the agreed-upon sales price, there are a few potential consequences.
First, you may decide to walk away from the deal, since you are not required to purchase a home that is worth less than you thought. Additionally, the lender may be reluctant to provide financing if the appraised value is too low, because they could end up with a home that is worth less than the mortgage.
Finally, the seller may be unwilling to lower their asking price. In that case, you’ll have to come up with additional cash if you want to purchase the property.
Coming up next . . .
After you’ve made an offer and navigated the inspection and appraisal process, you’re in the home stretch. Take a deep breath, stay positive, and trust your instincts.
The final stage is closing, and there are multiple people, documents, and decisions involved.
More on the closing process in Part Three (“Surviving Closing Day”) of the First Time Home Buyer Guide.
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