The Home Buying Process Step # 5 – The Purchase Contract. Buying a home is almost complete!
You are probably very excited at this point. Feeling anxious, nervous, little scared maybe…
Don’t worry, this is a normal feeling. Especially if you are a 1st time home buyer.
Home Buying Terms in The Real Estate Sales Contract
The real estate purchase agreement is a legally binding contract signed by home buyers and sellers that confirms a certain purchase price, closing date, and other terms including contingencies.
There are certain commonly used words you’ll want to remember as you continue down the road of homeownership.
These important words spell out RELATIVE INFORMATION such as how much money you’re paying, when you pay it, under what conditions you can back out of the purchase transaction, and more.
Below we will discuss 7 terms you are likely to come across in a real estate purchase agreement.
PLUS why you need to carefully check the provisions in the contract before you sign on the dotted line.
Home Buying Process And Escrow Accounts:
How does it feel to have finally found your new home?
What made you decide to purchase this specific house?
Was it a specific feature, amenity or community benefit?
Did you make the decision with an investment mindset?
Now that you have found your new home it is time to “Ratify” the purchase contract.
Your awesome real estate agent will have already sat down with you and walked through what a purchase contract looks like.
Residential Real Estate Purchase Contract
7 KEY-WORDS + 7 KEY-FACTS
HOME BUYING KEY- WORD #1- The Earnest Money Deposit (EMD)
The (EMD) as it is referred to, is the cash buyers commit to depositing towards the sale to show the sellers they’re serious about buying the home.
Checking the home’s purchase price on your contract is important as well, but you’ll need to be prepared to have money available to complete the sales contract.
The amount of the deposit is negotiable between both the selling and purchasing party.
EMD is typically 1% or maybe on a rare occasion 2% of the purchase price.
Once an offer has been accepted, the money is typically held by the seller’s broker or a title company, to be used as a credit toward the buyer’s down payment and closing costs.
NOTE: In an aggressive seller’s market, most homes receive multiple offers.
Be prepared for the competition!
If you find a home that checks off most of the boxes, don’t spend too much time thinking it over.
You will most likely lose out to more serious buyers. They have probably already lost out on multiple homes and understand the need to be prepared to act.
One way to make your bid stand out is to offer a slightly higher EMD (think 3% to 5%) to catch the seller’s attention.
This money simply goes towards downpayment and closing costs.
Any leftover funds are returned.
That being said, many buyers want to make the smallest deposit possible, to limit their risk of loss.
The caveat: If you back out of the transaction for any reason or contingency outlined in the purchase agreement, you get your earnest money back (more on contingencies next).
However, if you decide not to buy the house for any reason that is not included in the agreement, the seller can keep the earnest money.
HOME BUYING KEY-WORD #2 – Contingency
A contingency in a deal means there’s something the buyer (you) has to do for the process to go forward.
An example would be selling a property you already own.
Contingencies can also include a home appraisal, home inspection and mortgage loan approval.
NOTE: Contingencies protect you by giving you the ability to back out of the sale if something goes wrong.
They must be stated in the contract and in most cases allow you to receive your deposit back if you meet the conditions of the contingency.
Be aware that all contingencies have deadlines that must be met in order for the transaction to move forward.
HOME BUYING KEY-WORD #3 – Settlement Date
The settlement date, AKA “closing date,” is the day when all involved parties meet to make the sale official.
Buyers and sellers typically negotiate a settlement date that is mutually agreeable. In most cases, the seller determines which title company will be used to complete the sale.
Generally speaking, the buyers and sellers conduct their signing separately.
NOTE: When choosing a settlement date, make sure you’re giving yourself enough time to fulfill the home inspection, appraisal, and any other contingencies.
If you don’t meet your obligations to the purchase agreement by the settlement date, you could be considered “in default” and potentially lose your deposit.
HOME BUYING KEY-WORD # 4 – Possession Date
The possession date is the day when buyers can move into their new home.
Sometimes home buyers take possession of the home on the day of closing, and other times they agree to wait days or weeks after closing.
30 to 45 days is the most common time frame.
NOTE: The possession date is negotiable, and it can affect the strength of your offer.
For instance, if the seller needs a few extra months to find a new place to live, offering a 60-day possession date could make your bid more attractive.
Alternatively, some sellers allow the buyers to move in before settlement; this may occur if the house is already vacant.
HOME BUYING KEY-WORD #5 – Escrow
An Escrow Account is a secure holding area where important items (like the earnest money deposit check) are kept safe until the deal is closed and the house officially changes hands.
Although customs vary by state, the escrow holder is usually someone from the closing company, an attorney, or a title company agent.
NOTE: The purchase agreement states whether the buyer or seller (or both) pays escrow—with the fee for this service typically totaling about 1% to 2% of the cost of the home.
If you try to back out of the deal without a legitimate reason, you will forfeit your portion of the escrow money to the seller.
HOME BUYING KEY-WORD #6 – Delivery
When buyers and sellers sign a purchase agreement, they must agree to an accepted method of communication during the transaction as defined by the terms under “delivery”.
Email is generally an acceptable method of communication, but some people (say, older buyers or sellers) still prefer snail mail when receiving important documents, like the release of a home inspection contingency.
NOTE: Your buyer’s agent must abide by the terms of the delivery when communicating with the listing agent or seller. If documents aren’t delivered properly, it could delay or even void the contract.
HOME BUYING KEY-WORD #7 – Home Warranty
Simply put, a home warranty is a policy that covers the cost of repairing many of a home’s appliances if they break down. Basic coverage starts at about $300 and goes up to $600 for more comprehensive plans.
NOTE: Many home sellers will offer to pay for the first year of a buyer’s home warranty to entice buyers to bite, especially if the appliances in the house are old and/or it’s a buyer’s market. However, this must be written into the purchase agreement.
Next Step Towards Homeownership.
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Rod Ferrier is a licensed loan originator in Virginia and Maryland.
A U.S. Navy Veteran, father of four, he began his career as a loan officer in 2002.
He specializes in assisting his clients to navigate the home buying process towards homeownership.
His clients include Veterans, first time home buyers, families looking to purchase a bigger home, as well as empty-nesters seeking to downsize.
Rod’s background in financial planning provides his clients with the opportunity to benefit from the wealth created by strategically purchasing the right home.