The following is a brief eight-step summary of the home-buying process in the State of Rhode Island for first-time homebuyers and others moving to Rhode Island and buying in the Ocean State for the first time.
Step 1: Assemble Your Team — The state of Rhode Island recognizes two specific forms of agent-client representation relationships:
(1) Designated Client Representative and
(2) Neutral Dual Facilitator.
A Neutral Dual Facilitator is more commonly known as a dual agent, an agent representing both the seller and the buyer in the same transaction. A Designated Client Representative is an agent who works for one party, either the buyer or seller. He or she gives other agents within the same company the opportunity to represent the opposite side (buyer v. seller) or competing clients (buyer v. other buyers).
As a consumer, you should know that you have a third option not explicitly mentioned in Rhode Island's Mandatory Real Estate Disclosure. You can choose an exclusive buyer agent, a real estate buyer agent who only represents homebuyers. Your buyer agent is not an exclusive buyer agent unless everyone at his or her real estate brokerage only represents homebuyers. Only exclusive buyer agents are 100 percent loyal to home buyers, 100 percent of the time. Prospective home buyers should consider setting up a meeting with at least one exclusive buyer agent before deciding on who will help you buy a home.
An exclusive buyer agent can discuss loan programs, including first-time homebuyer programs, and recommend a mortgage professional to obtain a free pre-approval letter. A buyer agent also can recommend a real estate lawyer to review the purchase and sale agreement, closing documents, and explain legal matters. Later in the process, a buyer agent can suggest home inspectors (see below) and insurance agents.
Step 2: Mortgage Loan Pre Approval — A mortgage professional will collect some necessary financial information about your income, debts, and savings before providing a pre-approval letter. Prepare to provide your bank statements and pay stubs for the last 60 days and W2s and tax returns from the previous two years. The loan officer will also do a credit check.
At this stage, there is not any need to shop around for the best mortgage interest rate because a lender isn't going to lock in an interest rate until you have a home under contract, and interest rates change daily. You will not be obligated to obtain your loan from the lender that provided a pre-approval letter. Still, it makes sense to allow that mortgage professional to compete for your business once you are under contract.
A pre-approval letter is a statement from a mortgage lender (bank or mortgage company) indicating they have reviewed the homebuyer's credit score and credit report, supporting documents, and the buyer's finances. The review shows the homebuyer qualifies for a mortgage. On the other hand, a pre-qualification letter is typically a letter given based on information the buyer provides without supporting documentation or a credit review. When submitting an offer on a property, the purpose of providing a pre-approval letter is to reassure the seller that the buyer is likely to qualify for the mortgage necessary to purchase the home. Most sellers and listing agents prefer a pre-approval letter over a pre-qualification letter. Either way, sellers will not consider an offer without a pre-approval or pre-qualification letter unless the buyer is paying cash. You should have that letter in-hand before looking for homes.
Step 3: The Home Search — Any licensed real estate agent should be able to provide access to property listings through the multiple listing service (MLS). A careful and dedicated buyer agent looks for positives and negatives at a showing, highlighting apparent issues to the homebuyer, e.g., unsatisfactory grading or water drainage, and older components, such as the boiler, roof, electrical, plumbing, or windows. Your buyer agent should also advise you about issues that could make resale difficult, such as busy streets, awkward floor plans, or neighborhood eyesores. Find a buyer agent who will give you honest, straightforward advice, not just "sell" you a home.
The time it takes to find a house, condominium, or multi-family home varies for homebuyers. Some home buyers find a home and make an offer after seeing a few houses or condos, while others see 10 to 20 homes. Narrowing down the communities that you want to live in and the type of home you wish to purchase will make for a more efficient home search.
Step 4: Offer — Once you find a home and want to make an offer, your buyer agent should perform a comparative market analysis, often referred to as a "CMA." When you have your initial meeting with a buyer agent, ask how he or she puts together a CMA and what information he or she will provide to help you make an educated decision about the market value of the home you want to buy.
Rhode Island is a mandatory property disclosure state. Before making an offer, you should receive a property disclosure, and, for properties built before 1978, a lead paint disclosure from the seller.
It would help if you also discussed a negotiation strategy with your real estate agent. Just making an offer and waiting to see what happens is not an effective negotiation strategy. You should make an initial offer with your anticipated last one in mind. Homebuyers with a negotiation strategy increase their chances for a successful outcome. A good negotiation strategy considers a home's price relative to the local real estate market (overpriced, undervalued, or reasonably priced), the market history, current or projected demand, and other information obtained by your buyer agent.
Your buyer agent submits a written offer to the listing agent, who works for the seller. Besides price, your buyer agent should discuss and explain important details about your offer, including the deposit(s), down payment, items included with and excluded from the sale, the home inspection, mortgage financing contingencies, closing date, and anything else specific to that transaction. Included with the offer will be a copy of the first deposit check, typically $1,000, and a copy of your pre-approval letter (see above). Circumstances may vary, but it is customary to provide the seller with about 24 hours to respond to an offer. In real estate, no accepted offer is binding unless both parties sign it.
Step 5: Purchase and Sales Agreement — In Rhode Island, the form buyers typically use to make an offer is the Rhode Island Association of Realtor Purchase and Sales Agreement (P&S). Both parties sign the P&S, which will be the only contract involved in the real estate transaction. Some states, such as Massachusetts, have an initial contract. Others have a "bid sheet," but that is not the usual process in Rhode Island.
(1) An initial deposit when the P&S is signed, and
(2) A second deposit, typically shortly after the buyer's home inspections are completed.
Depending on the type of financing a homebuyer uses, the second deposit may be the balance of 5 percent of the home price, but it might be less in some cases. The amount of the deposits are negotiable between the parties. The listing office holds the two deposits in escrow until the closing (see below) unless otherwise specified in the P&S.
Step 6: Home Inspection — Rhode Island law requires the P&S to include a buyer's right to a 10-day home inspection contingency, exclusive of Saturdays, Sundays, and holidays; however, both RIGL § 5-20.8-4 and the P&S allows the buyer and seller to agree on fewer days or more days. A buyer agent can recommend a few experienced and thorough home inspectors to consider and provide you with a list of other items to check into during the home inspection period.
Besides the general home inspection, you may want additional evaluations, such as radon, well water, lead paint, pests, and private sewer (septic system) testing.
The buyer should attend the home inspection. Thorough home inspectors not only check the home for potential issues and answer your questions but also explain how to maintain your new home properly.
Step 7: Appraisal and Loan Commitment — Unless a homebuyer plans to pay cash to purchase a home, the P&S will contain a mortgage contingency. In other words, the deal is contingent on the buyer obtaining a mortgage loan.
Once the homebuyer completes his or her home inspections, the buyer's lender will order a real estate appraisal by a licensed Rhode Island appraiser. The lender has the home appraised to ensure that a property's fair market value, as determined by the appraiser, is equal to or more than the purchase price. If the appraisal amount is less than the purchase price in the P&S, that doesn't necessarily mean the buyer won't qualify for a mortgage loan; however, the lender may not agree to give a home loan for the full amount in the borrower's mortgage application. In such a case, the options would be for the buyer to put more money down at closing or for the seller to agree to reduce the sale price.
After a borrower submits a loan application with a loan officer (see above), the loan officer gathers all the borrower's financing information. The underwriter approves or denies a mortgage loan. Upon approval, the lender issues a formal loan commitment letter, which contains an offer to extend a mortgage loan to the applicant under specific terms and conditions, e.g., interest rate, length of the note. The purpose of the commitment letter is to inform the borrower the lender has approved the loan, as long as the homebuyer meets certain outstanding conditions.
The Rhode Island P&S states that once the loan commitment letter is submitted, the mortgage contingency "is deemed satisfied, regardless of whether the stipulations and conditions of the commitment letter are met. Buyer assumes all obligations in fulfilling any and all conditions of the commitment letter." Thus, it is imperative to understand the outstanding conditions in the commitment letter and whether or not there is a risk they might not be satisfied. If so, proceeding without an extension could put the homebuyer's deposits at risk.
Before the loan commitment deadline, a buyer should secure homeowner's insurance to make sure the property qualifies for homeowner's insurance at reasonable rates, and that there are not any factors that prevent a homebuyer from obtaining homeowner's insurance, sometimes referred to as hazard insurance. Such factors may include the property residing in a flood plain or prior claims.
The Rhode Island P&S has two provisions in the mortgage contingency worth noting:
(1) The mortgage contingency authorizes the seller or listing agent to communicate directly with the buyer's lender on the status of the buyer's loan application; and
(2) The P&S requires that the homebuyer submits to the seller's agent a copy of the mortgage loan commitment by the mortgage contingency deadline. On or before that date, the buyer must either send the seller's agent
(a) a copy of the loan commitment,
(b) a written denial letter, or
(c) a request for an extension to the mortgage contingency deadline.
Failure to send one of those notices, even if the buyer received a full loan commitment, is considered a breach of contract. Such a violation allows the seller to cancel the P&S and retain the homebuyer's deposit(s) as default damages.
Step 8: Walkthrough and Closing — Rhode Island homebuyers are entitled to a final walkthrough. Buyers usually complete the walkthrough the morning of the closing or the day before.
At the walkthrough, the buyer should make a note of the following.
(1) The property is in "broom swept" condition,
(2) The property is in the same general condition as when the P&S was signed,
(3) The seller has removed personal property not conveying with the sale,
(4) That all the appliances and property included in the purchase are present, and
(5) That the utilities and systems are all functioning correctly.
The seller's energy provider will calculate the fuel's prorated value based on the current price if there is propane or oil. The buyer should check fuel levels at the final walkthrough because he or she will pay the fuel's prorated value.
Closings take place, typically between 30 and 60 days after the seller accepts the offer. In Rhode Island, closing a real estate transaction is not defined as the practice of law, so a lawyer or title company can act as the settlement agent. Either way, Rhode Island General Law § 19-9-6 gives the buyer the right to choose the closing attorney or the title company. The closing usually occurs at the settlement agent's office; however, it could take place at a real estate agent's office or the municipalities Land Evidence Record's department at City Hall.
There are several legal documents a buyer must sign at the closing, most importantly, the following.
(1) The closing disclosure (2-3 page financial breakdown of the transaction),
(2) The note (a promise to pay back the loan), and
(3) The mortgage (the security instrument that gives the lender the statutory right to foreclose on a home for failure to repay the note).
A lender could foreclose for other violations of the mortgage, such as failing to keep the proper homeowner's insurance, not paying property taxes, and not maintaining the home properly. Also, storing hazardous wastes or other violations of federal, state, and local laws and regulations can lead to your lender moving to foreclose.