Earnest money. Inspections. Insurance. Appraisal. Financing. And closing. Oh my!
There is nothing hard about buying a home on the Main Line, but it is a BIG THING with a lot of pieces. It’s important that you understand the process from start to finish -- before you are in the middle of a transaction.
We're making it simple. Below you'll find our answers to the most frequently asked questions about buying a home. Read on!
Does it cost money to use a Realtor? How does commission even work?
In Pennsylvania, the homeseller usually agrees to pay the commission of the agent that is listing their home for sale as well as the commission of the agent that is representing the buyer purchasing the home. Essentially, this means that both buyer and seller agents are working for free until the deal is closed! Payments to the real estate agents on both sides are typically paid out of the proceeds of the sale. The commission often amounts to roughly 3% for each agent.
What are the upfront costs of buying a home?
While you are probably expecting to pay a mortgage once you've purchased a home, you will also incur some costs as part of the purchase. Those costs most commonly include:
EARNEST MONEY: Earnest money is a type of security deposit that homebuyers submit whenever a real estate contract is executed to demonstrate they are serious and sincere about completing the transaction. The earnest money serves as the seller’s default remedy if you breach the contract.
On the Main Line, most homebuyers put 5% of the sales price down as earnest money. That means if you’re buying a $500,000 house, you would put $25,000 down as earnest money. In a competitive market, many buyers decide to increase the amount of earnest money to make their offer more attractive to the seller.
The earnest money is paid to the title company where it is cashed and deposited into an escrow account and held on the seller’s behalf. When the purchase of the home is complete and the transaction is closed, the earnest money is credited toward the final sales price. It is applied as deposit toward the final purchase price of the home. If, for some reason, you decide not to proceed with the purchase of the home during your inspection contingency period, your earnest money will be refunded.
After you execute a real estate contract to purchase a home (meaning all of the terms are agreed upon and all parties have signed the contract), you typically begin an inspection contingency period. This period is a span of time in which the homebuyer has an unrestricted right to terminate the contract for any reason so long as proper and timely notice is provided to the seller. As the homebuyer this is your opportunity to conduct any due diligence necessary before moving forward with the home purchase. During this period -- often 10 days -- we commonly have the home inspected (see below) to determine if there are any underlying issues (roofing, plumbing, electric, etc.) that could affect the price of the home.
INSPECTION COSTS: Before your home purchase is finalized, we advise our clients to pay to have the home inspected by a licensed home inspector. The inspector will review the condition of the house and the primary structural and mechanical systems. Inspection costs vary based on the size of the home and the services the inspector is providing. For a standard inspection of a single family home in this area a buyer should budget $400 - $700.
Of course, other inspections require additional fees. Radon and termite inspections are standard in this area and generally cost $150 each. Depending on the age, construction, or special features of the home, we may recommend additional, specialized inspections. Septic, well, swimming pools, foundation, and stucco are other special inspections that might be appropriate depending on the home. Conducting this additional due diligence for a larger home can cost as much as $3,000 if all of the above test and inspections.
LENDER COSTS AND FEES: As part of processing your loan to purchase the property, the lender incurs fees that they often pass on to you as part of your closing costs that are paid at the end of the transaction. These fees cover expenses like the appraisal, credit report, recording, legal fees, and more. You will see a detailed list of the fees you are paying as part of a "settlement statement" the lender provides to you at least three days prior to closing.
DOWNPAYMENT: This is the portion of the purchase price that you pay at closing, while the rest of the purchase price is typically paid over time through a mortgage. We traditionally speak of down payments as percentages (5%, 10%, 20%, 30% down, etc). The downpayment is paid at closing either via a wire or cashier’s check.
How much do I need for down payment?
It depends. Your lender may require a different amount of down payment depending the purchase price of the home, your credit history, and other factors. There are also financial benefits to paying different downpayment percentages. For example, putting more than 20% down is often advantageous as it helps borrowers avoid private mortgage insurance which can be quite costly. All that said, it's common for folks to make a 5% - 20% downpayment on their home.
What's the difference between assessed, appraised, and market value?
We get asked all the time about the different values assigned to a property, and why they often seem to be so substantially far apart! Here’s a quick rundown of the various ways of valuing a home:
MARKET VALUE: Simply put, this is what a buyer is willing to pay for a property. A real estate professional will use their knowledge of the market as well as a comparable market analysis of recent sales of similar properties to give a range of value for a specific property; however, there is both an art and a science to this process so each real estate professional may have a different opinion of value.
APPRAISED VALUE: An appraisal takes place if there is financing being obtained on a home (or some other situation arises, such as for estate/probate purposes). Basically, a lender wants to be sure that the home is worth what the buyer is paying (and what they are lending), as they will be holding a mortgage on the home as collateral for their loan. Appraisers traditionally will create a radius around a property and select 5-6 comparable properties that have sold, and add or subtract value based on the finishes, overall condition, and basic specs of a property. If the appraisal is for financing purposes, it is important that the property appraises. If it does not, the lender may deny the loan.
ASSESSED TAX VALUE: This is an assessment done for tax purposes. The county tax assessor’s office places a value on each property in the municipality every ten years in order to ascertain what the tax on each property should be. Often the county tax value does not align with the market value of the home. This is because there are no laws in Pennsylvania that require the disclosure of what homes trade for. As a result, the taxing entity is often relying on incomplete information to calculate assessed tax value.
Where do my option money and earnest money check go?
The earnest money is paid to the title company where it is cashed and held in escrow on the seller’s behalf. When the purchase of the home is complete and the transaction is closed, the earnest money is credited toward the final sales price. It is applied as deposit toward the final purchase price of the home. If, for some reason, you decide not to proceed with the purchase of the home during your inspection contingency period, your earnest money will be refunded.
What is a bidding war?
Current market conditions are simply a function of supply and demand. When there is a high demand for homes but a low inventory of homes on the market, it is considered a seller's market. In a seller's market it is common to have multiple buyers bidding on the same one property, which creates “the auction effect” – or a bidding war -- where they compete against each other to purchase the home. A bidding war can also occur when a seller prices their home below market value, making it extremely attractive to potential buyers. In either case, a bidding war often drives up the purchase price of the home.
While price is often a determining factor, it’s not always the highest price that seals the deal. Sometimes other aspects of the offer add significant value to the seller. Limiting the length of the option period, increasing the amount of the option money, or providing an opportunity for the seller to lease the property back while they secure a new home are just some of the factors that can make an offer more attractive to the homeseller. Limiting the contingencies and lessening the risk for sellers can be key to winning the deal in a multiple offer situation.
There are no rules on how multiple offer situations are handled. Some real estate agents negotiate the first offer that comes in, where others ask for the highest and best offer by a certain date. We’ve developed our own thoughtful process when working with sellers where we inform all potential buyers that the house is now in a multiple offer situation. We tell all buyers our preferred terms and invite them to bring their “highest and best” offer by a particular date. This allows us to be transparent with all parties, while also allowing the potential buyers to improve their position before the seller makes a final decision.
In a bidding war, there is often an emotional desire to “win” that may overpower your pre-determined spending limits. Use caution and talk through the options with your real estate agent.
I’ll get a better deal working with the listing agent, directly, right?
Usually – wrong. A listing agent works for the seller, and they are obligated to work in their client's best interest. When it comes to negotiating, the listing agent will NOT have your best interest at heart. The listing agent also has a fiduciary responsibility to the seller which means that they anything the agent working for the seller learns about you, they are required to disclose to the seller (unless you and the seller sign a dual agency agreement which basically makes the listing agent a messenger between the two parties). Simply put, if you work with the listing agent directly, you have no representation or advocate in your corner.
Would I be better off waiting to buy once the market cools down?
With Main Line home values continuing to appreciate, it can be tempting to wait for the market to slow. Certainly, there is a cycle to real estate but in the last thirty years we have only seen prices go down twice – once in the 1980s and again in the recession between 2009–2012. Even then, the decrease was only 3–5 %.
As you think about the timing of purchasing a home, there are a couple of variables to consider:
1. Interest Rates: As interest rates rise, buying power decreases. The negative correlation of rising rates often outweighs the impact of a market slowdown. An example puts it in perspective. Every .5% rate increase represents an additional 5.5% that you'll pay each month. For a 30-year loan on a $500,000 home purchase with 20% down, you're looking at an additional $43,000 in mortgage payments over the term of the loan for each .5% increase in interest rate.
2. Do you have something to sell?: If you are planning to leverage equity from a current home or need to sell before you buy, keep in mind that as the market cools down, so does the value of your investment.
There are pros and cons to every market condition. Talk to an experienced Realtor and mortgage professional to discuss various scenarios for your next purchase.
Is a condo or single family more liability?
It’s not necessarily a matter of “more” liability, it’s a matter of how it’s shared. With a single-family home, your homeowner’s insurance will be more expensive than a condo policy, and general maintenance and repairs are solely the owner's responsibility, so there could be more work/additional cost associated with a single family home. A condominium spreads the liability and burden of maintenance and repair costs across all of the owners, and your condo insurance policy is generally less expensive as the association’s master insurance covers a lot of the larger ticket items (roof, etc). It’s important to work with your agent and lender to understand the implications of each when deciding which is a better fit both financially and from a maintenance standpoint longterm.
What do I need for a pre-approval for a home loan?
A solid pre-approval can certainly give you the leg up on competing offers, so it’s important to be ready when it comes to working with a lender. In short, your pre-approval is the lender saying you can afford “x” after taking a quick glance at your financial situation. In order to be best prepared for getting pre-approved, begin compiling the following items:
Tax returns for the past two years.
Pay stubs for at least three months if you have an employer or tax returns and profit and loss statements if you are self-employed. If you are changing jobs or relocating, a copy of your employment offer letter. Talk to your lender about any potential change in your employment prior to seeking pre-approval, as it may impact your ability to obtain a loan.
Bank statements for the past three months.
Other asset/income statements, such as 401k, retirement accounts, or real estate leases if you own investment property.
If obtaining money from a third-party like a friend or family member, you will need a "gift letter," which your lender can help you with.
An idea of your credit score and monthly debts – student loans, car loans, etc. will be used to calculate your debt-to-income ratio, an important factor in mortgage lending.
If you have a mortgage already, a couple of months of mortgage statements.
If you are divorced, a copy of your divorce decree and documentation of any child support payments.
Getting all of these items together in advance will help you and your lender be prepared. Many lenders, if given all of this information up front and authorized to pull your credit, will actually be able to pre-underwrite your loan, meaning that you will be approved as a buyer and they will simply need to “approve the home” via appraisal. This can be a huge bonus and help you stand out in a multiple offer situation.
Of course, getting pre-approved for a home loan comes after you've selected a lender. The majority of lenders will have very similar rates; however, a local lender on the ground in the area you’re looking in will likely be more competitive and better-known amongst agents, which surprisingly can have an impact on the credibility and weight given to the pre-approval.
We know that choosing a home is one of the most important decisions you can make, and we take pride in guiding you through the process of finding that special home where so many of your best memories will be made. If you have more questions, please reach out.