Understanding the Transaction: Real Estate from Start to Finish

Understanding the Transaction: Real Estate from Start to Finish

Although the best way to understand a real estate transaction is to meet with a real estate agent or lending professional, there are some general steps involved in the real estate transaction process. From financing to escrow, it's a good idea to get at least a general idea of how a real estate transaction is handled before you take that big step toward homeownership.

The First Step: Lenders and Realtors

The first thing potential homebuyers should do is meet with a mortgage professional and a real estate broker. A realtor is your best resource to find the home that's perfectly suited to your needs, and a loan officer will be able to sit down with you and discuss your financial situation, go over your credit and give you a definite budget for a new home based on the monthly payment amount that works for you. Then, with a pre-approval letter in hand, it's time to go house hunting!

Finding that Perfect Home

When looking for the home that's right for you, your realtor will sit down with you to determine your needs and wants. What size home are you looking for? Which neighborhood(s) do you prefer? Do you like a particular style of home; old or new? How many bedrooms and bathrooms do you need? These are the types of questions you should already be thinking of before you meet with your realtor; however, he or she should be able to sit down with you, based on your pre-approval amount, and determine the houses that might be best for you. Your realtor will then take you on a tour of homes that are best suited to the idea of what you're looking for.

Making an Offer

When you find that perfect house, it's time to make an offer. Your realtor will help you go over the paperwork—called an earnest money agreement—but, generally speaking, this is what you can expect:

  1. Be prepared to present earnest money, or the amount of money you're willing to put down as good faith that you do wish to proceed with the transaction.
  2. State your down payment, either in a lump sum amount or percentage of the home purchase price. Are you planning on putting 10% down? 20%? Has your lender helped you with a program that asks for zero down? Whichever the case, you'll state your intentions on the earnest money agreement.
  3. How do you intend to pay for the rest of the transaction? You'll also need to state for the sellers what type of loan you'll be using to pay for the rest of the home, whether it's an 80/20 loan, 70/30 loan, FHA or other conventional or non-conventional loan program.
  4. Other stipulations, such as which party is paying for which portion of the closing costs, additional inspection requirements, addendums, counter-offers and more may apply; each transaction will differ.
Offer Accepted!

Once your offer is accepted, the home inspection period begins. This is when the buyer pays for a home inspector to come through the property and test the structure, systems and more. Sometimes this process includes multiple inspectors; it depends on the age of the home and particulars of the transaction. Regardless, after the inspection, negotiations are done for repairs and once and if an agreement is made, the transaction continues.

In the meantime, the lender has been working hard at getting your loan application through, your credit checked and your employment verified. Once the inspection period is complete and repairs are negotiated, the lender orders a home appraisal of the property. The home must appraise out to at least the amount of the home's sales price. If not, price negotiations continue; if so, the sale may proceed.

The Escrow Process

During the inspection period, your realtor has also worked toward getting escrow opened. This means that your transaction has been assigned to a neutral company—usually a title company—that acts as escrow agents. All money and documents as part of your transaction will be handled objectively and fairly by this professional third party. They will handle the intake and eventual distribution of earnest money, and will perform title searches and due diligence on the property you're about to purchase. They'll issue a title report, listing if the property or property owner has any liens or additional issues, and will mail out the documents to the realtors, lender, seller and buyer.

An escrow company isn't allowed to make any decisions on its own; escrow instructions can only be made from both parties. Therefore, the only thing that happens in escrow is what you've instructed in your earnest money agreement: how much you're paying in earnest money, down payment and final loan amount, as well as considerations for repairs and closing costs. Any changes to this agreement—and therefore any changes to escrow—must be put in writing and signed by both parties, the seller and the buyer.

The Signing

The final step in a home transaction is for the lender to send in the loan documents to the escrow company. This will happen once the appraisal is done and underwriting for the loan is complete, but usually no sooner than 14 days from the date of the mutually-agreed upon offer. Once the documents arrive in escrow, each party makes a separate appointment at the title company to come in and sign off on their half of the transaction. The seller signs that they agree to sell the property, pay for any stated closing costs and/or repairs and commissions; and the buyer signs similar paperwork, as well as the necessary loan documents, to complete the purchase.

The Closing

Many people confuse the signing process with the actual closing of the property, but the sale of a property doesn't actually "close" until the signed loan documents have been sent back to the lender, they have been reviewed, and the money is released for funding. Once the property is "funded," the escrow company ensures that the title legally transfers to the new buyer and the transaction is complete. Your realtor will then meet you to hand over the keys—and you're free to move in and enjoy your new home.

Please note that while this is a general instructional guide, real estate transactions and lending processes may vary from state to state; for additional information, please see your local lender or real estate professional.