The below 8 steps are typical for FSBO buyers
1. Gather your paperwork
To prepare for buying a home, you're basically preparing to get a loan. There are several loan options to you which your lender or mortgage broker will explain, but most likely you'll be getting what's referred to as a "FHA conforming full doc loan." For that loan, you're going to need proof of income - which means 3 years worth of tax forms, recent payment stubs plus recent statements and current balances of bank and investment accounts (any large sums of money will have had to have been in your accounts for at least 90 days). You may also have a gift from a family member as a contribution - if you've received that within the past 90 days, your lender will probably make sure that you get a letter stating that it is indeed a gift and not a loan. All of this will need to show that you can support an acceptable "debt to income ratio" and that you have a reasonable FICO credit score of usually at least 600 (which is on a scale of 300 to 900).
2. Determine your price range and neighborhoods
If you ask your lender what debt to income ratio you need to maintain to get the lowest loan rate, you'll have an idea of where to begin your (lower end) shopping price range. What you do is multiply the front-end ratio times your monthly income (household if you will be buying jointly with a spouse AND you both have good credit) and find out what mortgage payment you can support. Asking on the high end becomes a balance between interest rate, payment amount, level of financing and the maximum amount you can qualify for/highest debt to income ratio. Be sure to have your lender explain the differences between front-end and back-end ratios to you, so there is no confusion. These two numbers, which your lender can help you quickly arrive at, tell you what your price range for houses is. Realize that it is your lender's job to estimate on the conservative side, so you may be able to squeak by with a little bit more loan than they tell you. Then again, especially in a market with rising interest rates, you want to be sure that you won't ever be in a risk to lose your home from not being able to make the payments. Here is a (simple and conservative) online "how much home can I afford" calculator. You are going to need to be ready to write a check for about 1% of the purchase price of any home that you look at and want to make an offer on.
If you already own at least one home and are a renting landlord, then you have both additional income and additional expenses to show in the above calculations - you should show income from any rental property and that will count in your favor. Note that you'll need signed lease agreements, copies of checks and bank statements to prove rental activity - as well as anything else your lender asks you for.
3. Your lending team
Your lender or mortgage broker is 100% on your side in helping you to do everything that you can to get the loan for the house (they're getting paid to bring the loan in). Ask them questions to find out exactly what you need to do in order to qualify for the best loan that you can. Not sure if something might be risky? Try posing a question hypothetically to see what the answer might be - don't be afraid to ask - you need to know all the possibilities to get the best loan that you can. It is not the lender representative or mortgage broker who determines whether you get the loan or not - their job is just to help you assemble the paperwork. It's the underwriters at the actual loan institution who will determine if you will get the loan - and you will never directly interact with the underwriters. Your lender or mortgage broker is your partner throughout this entire transaction - you need to find somebody with whom you get along very well, you trust, and who can creatively solve situations. Here is an online mortgage loan payment calculator.
4. View homes
OK - It's time to go shopping! If you haven't been out looking for homes for sale in specific price ranges recently, be prepared to spend some time getting up to speed. The average homes looked at before making an offer can be more than 12 or 13. Once you get a feel for what exists in your price range and neighborhoods, there's a good chance that the right home will just "click" when you walk into it. Because there is no real estate agent hunting down homes for you, look for FSBOs in the locations where they're being advertised - the local sunday newspaper classifieds, bulletin boards and on this website. Drive around the neighborhoods you're interested in and look for what homes are available.
Most FSBO sellers prefer to show their homes by appointment only, but will list their personal phone number right on their yard sign or website listing. Call them and set up an appointment during the day. Bring a photo ID to your showing and sign in if they have a log book. In a FSBO transaction, the owner will be present while you're looking at the house, but probably won't bother you. You might ask the seller how they arrived at their asking price (see the FSBO Formula), but don't haggle over that price verbally or make any negative comments about the house - it won't help get the price down for you and could only just upset the buyer. Because there are no agents involved, you and the seller will be directly interacting and you both must remember that this is a diplomatic business transaction. Keep the emotions out of it. If you want to be emotional, go pay 6% for real estate agents to mediate for you!
Like the home? Great! First make sure that you get a copy of the EPA Lead pamphlet and the seller-filled-out-and-signed Lead Disclosure before you leave the house. Also ask the seller to whom earnest money checks should be made out to, who their title company is and if they have a copy of their legal description of the property - all of which you will need in order to make an offer and create a real estate sales agreement. Then let your lender know the price of the home and they will assemble a good faith estimate based on "locking-in" that day's interest rate and letter of loan pre-approval. Here is an online mortgage qualification calculator. Now you're ready for the next step!
5. Make an offer with earnest money deposit
Ask the seller if they have an Offer to Purchase and Real Estate Sales Agreement or consider buying/printing one yourself. You may check some of the online free or fast-estimate websites to verify that the seller has asked a reasonable price for the house. Also ask yourself if it's worth the risk of losing the house by saving a few thousand dollars off of your total mortgage amount. Once you've come around to the amount you're going to offer, use an offer to purchase agreement (or a consolidated offer to purchase and real estate sales agreement) and get the process rolling.
In your agreement, it's common to ask for an acceptance/rejection of offer within a day, to ask for a home inspection within 10 days, to set contingencies for your approval to move forward to closing, to specify the closing title company, to ask for a title insurance policy, to ask about right of entrance to property before closing, to require about three days for response to further counteroffers or amendments, and to set the closing date at about 30 to 45 days in the future - whatever works best for you and your lender. As always, the information on this website is subject to our terms of use, and has important legal consequences. Many people prefer to contact a real estate attorney to help them with the agreement. You can certainly ask your mortgage broker if they have any recommendations of people to contact, or paperwork which you can use.
You will now be in constant communication with the seller (and your lender) until closing, so you're going to need access to a phone as well as a convenient location where you can send and receive faxes. With your filled-out offer to the buyer, you should additionally present the letter of pre-approval from your lender (if you don't, the seller is going to ask for it right away anyway) as well as your "earnest money deposit," (required). The earnest money deposit is a check typically made out to the seller's title and escrow company - who will hold it in a non-interest-bearing account until closing. The amount of earnest money is completely up to you, and reflects to the seller the seriousness of your intent and ability to buy. While a round number close to one percent of the offer price is typical, you may choose to give more or less. The agreement stipulates how the earnest money deposit is handled in case the real estate purchase doesn't make it to closing. If the purchase does get to closing, then the earnest money is considered part of your down payment towards the house and any closing costs you will owe.
6. Coordinate with Lender
Be sure to ask your lender about your options for financing closing costs and avoiding PMI, with options like taking out a second mortgage at the same time as the first one - it's possible to finance homes for 103% (or more) of the sales price! Be wary of the situation that highly leveraged loans can put you in... you probably shouldn't be considering an Adjustable Rate Mortgage (x-year ARM) unless interest rates are on their way down or you are sure to sell your home within 10 years. At this point, you will need to be working with your lender to follow procedure and get all documents and questions responded to in a quick manner. You will also be communicating with the seller regarding optional counteroffers and amendments. Keep the communication lines open!
7. Home Inspection and Amendments
Within whatever period you specify in your agreement (typically ten days), you have the right to have the home inspected. It is common to use a professional and certified home inspector for this process. It is also common to set a contingency in your agreement that it is subject to your receipt and acceptance of a satisfactory home inspection. Usually a home inspector will find several things on their report for a house - you should discuss with them right there at the house the seriousness of any shortcomings... is it a major structural issue or a minor equipment issue? Based upon the home inspector's report, you have the right to request in an amendment that the seller either fix issues or credit them off of the purchase price. If the seller has used our FSBO Formula, then they have already taken an average amount off of the price of their house to prepare for these findings - so be prepared for the seller to reject amendments. Again, ask yourself if a $400 water heater is worth losing the right $400,000 house. This FSBO method is about having a correctly priced transaction that can result in an expedient sale.
Your mortgage broker or lender will order on your behalf an appraisal on the property about this same time. Then you will get a "commitment letter" from the lender detailing the remaining documents needed from you to close. Continue to work with your lender, as they communicate with the seller's title company to get you to closing. Typically the day before closing, you will get to do a "walkthrough" which is your chance to see that any repairs agreed upon in the amendments are done, as well as to see that the seller has moved all of their belongings out of the property (unless you'll be short-term renting it back to the renter for a few days after the closing date).
8. Closing and Funding
This is it - after all the paperwork, communication and maybe some negotiating, you're ready to purchase your new home! Your title company, through your lender or mortgage broker, will notify you of the date and time of your closing. Bring a photo ID and your spouse with their ID if you're married - you may need to go through the steps of quitclaim deeds. Review the settlement statement provided by the title company very carefully. Your lender or mortage broker will probably be there with you to answer any questions you may have, as will your real estate attorney, if you have one.
Once you've signed and dated all of the paperwork, the title company must record it, record the seller's paperwork and transfer funds between your lending company(ies) and the seller's lenders. It is for this reason that the funding date is about two business days after the closing date. On the funding date, you should be able to return to the title company and pick up the keys to your new home!
