Step 5 to Purchasing a Home

Once you have finally chosen a home to make an offer on, you will need to sit down with your realtor and fill out a contract. Most of it is standard, but filling in the blanks is an art best dealt with by a highly competent realtor. Many things are negotiable. Most important may be price. Where you start may depend on many factors. How badly do you really want this particular home? How well is it priced? What can you afford? What kind of market is it, how many other people are looking at this home, and how many other homes would you be satisfied with? It's possible that making a strong price offer will help you acquire other negotiations such as closing costs.

The next negotiable item is the amount of earnest money. This will be held in a 3rd party escrow account until closing and credited back to you then. If anything out of your control causes the contract to fall through, you will be refunded your earnest money. The amount depends a little on the price of the home. The more you put down, the more serious you seem to the seller.

Most of the time, there are many contingencies put in the contract to protect the buyer. Examples of these include contingent upon financing, appraisal, inspection, termite letter, and your ability to obtain insurance. You certainly don't want to be forced to buy the property if the bank won't give you a loan, or if it doesn't appraise for as much as the bank will give you, or if the condition of the property is much worse than you thought, or if it is found to have termites, or if you cannot obtain insurance at a reasonable price. Of course, your contract looks weaker to a seller as you increase the number of these contingencies.

Another very important negotiable item is closing costs and prepaid items. These generally costs a buyer about 3% of the purchase price. Closing costs include money to the bank for the loan and money to an attorney for title searches, title insurance, and paperwork. Prepaid items include insurance and taxes. The bank wants you to pay for your insurance a year in advance and 3 more months on top of that. They also want you to pay some of your property taxes in advance. In fact, part of your monthly payment will include a portion to be set aside by the bank so they can pay your T&I for you at the end of the year. This is called an escrow account. The amount of extra prepaids that they collect at closing for T&I will be held in this escrow account to protect the bank. On a $200,000 home, 3% would amount to $6000. That can be a lot of money for buyers to come out of pocket with at closing. One way to alleviate this burden at closing is to have the buyer get a loan for $206,000 and have the seller pay for the buyer's closing costs and prepaid items. Essentially, the buyer has financed these extra costs into the cost of the home.

Another negotiable item is a home warranty. Many sellers offer this upfront. Most others are willing to buy one for one year for the buyer.

Another item that some sellers offer is a buy-down. For a certain amount paid to the bank, the seller or buyer can buy down the interest rate for the either one year, two years, etc. This can be important to a buyer that really needs to keep his monthly payment down for the first year or two.

Once the contract is written up and sent to the listing agent and the seller, they can either accept your terms or make a counteroffer. You can then accept their counteroffer or make one of your own. Once both sides have agreed to all items on the contract, we say that it is ratified and it becomes a legally binding agreement. Once this has been achieved, you can move on quickly to step 6 of purchasing a home. That will be obtaining a mortgage. Hopefully, you have already laid some of the groundwork for this.