The Homebuying Process
The homebuying process can seem daunting and overwhelming, especially in a competitive real estate market like many throughout California. While real estate attorneys and agents deal with the purchase and sale of properties daily, most people complete a real estate transaction only a couple of times in their lives.
To simplify an otherwise complex transaction, it can help to think of the process in three main phases: pre-escrow, contract performance (or escrow), and closing.
The Pre-Escrow Phase (3-6+ months)
Mortgage Pre-Approval (typically 1 day – 3 weeks)
Unless you are paying all-cash for your new home, buying a home generally starts with saving up for a down payment and getting preapproved for a home loan. A loan preapproval can help you understand how much money you can qualify to borrow, learn about different loan products, and get a more accurate idea of your expected monthly housing cost – or the “PITI” (principal, interest, property taxes, and homeowner’s insurance). You can work with your lender to determine how to get a monthly housing payment that you are comfortable with, whether that might mean making a larger down payment, targeting a lower purchase price, or buying down your interest rate.
There are three different types of mortgage preapprovals: pre-qualification, preapproval and underwritten preapproval. Each has their own advantages and disadvantages, and which one you get will depend on your individual circumstances. You will likely want at least a preapproval, if not an underwritten preapproval. A basic preapproval can happen in a day or two, while a more detailed underwritten preapproval can take up to a few weeks. You will need to provide the lender with your financial information, such as tax returns and bank statements.
Although gathering documents can be time intensive, getting preapproved early in the process can ultimately save you time in the long run. You won’t waste time looking at homes outside of your price range, or perhaps you will learn that you can afford more than you initially thought, allowing you to get a bigger home or better location. When you find a home that you’d like to make an offer on, you will be prepared with a preapproval, able to move quickly on an offer and not potentially miss out on a home that you love.
Home Search (typically 3-6 months up to 1 year)
It is not uncommon for the home search process to take several weeks or months. It can often take longer than expected, largely due to a lack of housing supply in many markets and strong buyer demand. On the other hand, you may find a home that you love within just days or weeks. Either way, you can expedite this process in a few ways:
Understand your must-haves vs. nice-to-haves. Homebuyers often start with a list of features they must have, only to later decide that they don’t truly need those features; and all the while they have missed out on homes that fit their true must-haves. It can help to preview different properties in a variety of neighborhoods and price points to get a better sense of what’s most important to you.
Understand what’s within your budget. While you may see homes listed for a price you can afford, those homes often sell for thousands of dollars above the listed price. Instead of focusing on homes for sale, research what homes in your area have recently sold for and what features you can expect from homes that have sold in your price range.
Set realistic expectations. Remember that no home is perfect, and there are almost always tradeoffs. If you are purchasing a home with another person, make sure you are on the same page with your priorities.
Offer, Negotiations and Acceptance (typically 1-3 days)
Congratulations, you are at the point where you found a property you love and want to make the seller an offer! In many competitive sellers’ markets, the seller sets an offer deadline on which they review any offers received and decide which to accept or counter. Otherwise, they review offers as they come.
Offers are made on a written purchase agreement and presented to the seller with other relevant documents. The offer and negotiation process can vary widely depending on unique circumstances of the property and number of interested parties, but you typically expect to hear a response from the seller the same day or the following day. You may receive a counteroffer, which you will typically respond to the same day or the following day, as well. There may be some additional back and forth until an agreement is reached. Once you agree on all terms, all parties sign the contract, and you can celebrate another big milestone!
The Contract Performance Phase (“Escrow”) (2-4 weeks)
Earnest Money Deposit (1-3 days)
An earnest money deposit is typically due within one to three days of your offer being accepted. The deposit is typically three percent of the purchase price, and this amount is credited to your down payment and closing costs. A deposit is typically sent to the escrow company by wire transfer but alternatively can be paid by check.
Disclosure and Diligence Period (typically 1-2 weeks)
If you have negotiated an inspection period, you will typically have just a few days to conduct inspections and complete your due diligence. This can include a physical inspection with a certified inspector, a contractor, or on your own. During this period, you may also wish to research local requirements if you plan to make changes to or expand the property, conduct a title review or perform any other research that is important to your purchasing decision. Since the diligence period can be short, it helps to give your go-to contractor a head’s up that you are searching for a home or making an offer so they can be available for a last-minute site inspection.
If the seller hasn’t already provided their disclosures in advance, they will make those disclosures during this period. You will have a few days to review their disclosures and confirm your decision to move forward with the purchase or renegotiate if needed.
Appraisal (typically 1-2 weeks)
Once your offer is accepted, your lender will arrange to have the property appraised by a third-party appraiser. The appraiser will inspect the property, research homes sold nearby and provide their opinion of value. This is typically completed within one to two weeks, and you will receive a copy of their appraisal report. If the appraised value is lower than the contract price, your lender may require you to make a larger down payment or, you may be able to renegotiate the price.
Loan Underwriting and Final Loan Approval (typically around 3 weeks)
During the escrow period, your lender will gather various documents from you regarding your finances. Your file will be reviewed by the lender’s underwriter, who determines whether you are qualified to pay back your loan or if it would be too risky for the lender given your financial qualifications. The underwriter may have follow-up questions for you or condition their approval on receiving additional information. Once they are satisfied with the information you have provided, they will issue final loan approval, typically within a few weeks of your offer being accepted. The lender will issue you a Closing Disclosure regarding the terms of your loan, which by law you are given three days to review. They will also prepare loan documents for you to sign stating that you will repay the loan according to the terms of the agreement.
Notice to Landlord (typically 30 days prior to moving out)
If you are currently renting, you will want to notify your landlord of your move, as provided in your lease agreement. While you don’t want to wait too long and must pay both rent and a new mortgage simultaneously, you may want to wait until your loan is approved or close to being approved before finalizing moving plans.
The Closing Phase (1-3 days)
Signing and Funding (1-2 days)
You will meet with a notary to sign the loan and title documents, and you will deposit the balance of your down payment and closing costs. Once the lender receives a copy of the signed documents, they will send your loan funds to the escrow company, and the escrow company will release the documents for recording.
Closing (1 day)
Congratulations, you made it to closing day! On closing day, the escrow company will record the title transfer, officially transferring title to the new owners. They will disburse the funds to the seller and any others who are paid through escrow in connection with the sale of the property.
In some states, closing a transaction still happens in person (at the “closing table”), but this has become less common. In California, it is customary for the closing to take place without the buyer or seller physically present. In fact, many parties are located in a different city, state, or country on closing date.
Unless there was a different agreement, you will get the keys to the property on closing day, once the documents are recorded.
As you can see, the process of buying a home can take anywhere from a month to a year (or more). There are a lot of moving parts, but by working with a trusted and experienced team, you can have a smooth homebuying experience and end up in a home that you’ll enjoy for years to come.