Buying a Home in Chicago: How to Buy and Finance a House
In this article, I provide a step-by-step guide for first-time buyers and answer common questions about buying a home in Chicago.
Step 1: Get Preapproved
Unless you can pay cash for your home, the first step is to apply for mortgage preapproval. A pre-approval, unlike a pre-qualification, proves that you can close on a home purchase as long as the property meets the lender’s guidelines. A preapproved offer is almost as good as a cash offer.
Most sellers want you to submit a pre-approval letter or proof of funds (if paying cash) before they will accept your offer. And many sellers, especially in areas where COVID is still a concern, won’t allow you to view the home without proof that you’re serious and capable of closing.
Pre-Qualification vs Mortgage Preapproval
Many consumers use the terms prequalification and preapproval interchangeably. They are not the same thing at all.
A prequalification letter usually just states that according to information provided by the buyer, this person should be able to afford a mortgage up to X amount. The statements from the borrower have not been verified and usually no credit reports have been pulled.
Most lending and real estate professionals don’t take a prequalification letter seriously. It’s better than nothing, but not much.
I strongly advise buyers to get preapproved before shopping. If you find a home you absolutely fall in love with and later discover you can’t get the loan for it, you will have wasted your time and will be very disappointed.
What Do I Do Once I Find a House?
Once you find a home that you like and can afford, you’ll make an offer. If you have a buyer’s agent, this person will help you. However, you’re the one who will be paying for the house, so offer what you want to pay and don’t exceed your comfort zone. And remember that agents’ commissions are based on the sales price of the property.
If you’re serious about buying, you want a strong offer. There are ways to create a strong offer that do not involve paying more than you can afford.
- Attach an earnest money check to your offer. Experienced property investors do this because the check proves you’re serious.
- Don’t submit a “low-ball” offer if you really want the property. Some sellers find them insulting and they may not even counter your offer.
- Limit contingencies. It’s not a strong offer if your current home must sell before you can close, and it’s been on the market for a year. You can avoid a troubling financing contingency if you are preapproved.
- Most sellers want a fast closing. be flexible and offer to close on their schedule if you’re highly-motivated,
- Don’t require too many seller concessions. n a buyer’s market, you may get them to pay your closing costs or cover a mortgage insurance policy or throw in a home warranty or a snow blower. But asking for too much can backfire in a seller’s market.
Other experts recommend checking out the seller’s social media and seeing if you have anything in common and can make a connection. Sometimes, a warm letter with your offer can give you an advantage.
What Price Do I Offer?
Buying a home in Chicago can be a challenge in some neighborhoods because of low inventory. The asking price is a starting point but should not entirely guide your offer. Some sellers price low, hoping to start a bidding war. Others price high, hoping for a magic idiot with a fist full of cash.
Your agent should be able to prepare an comparative market analysis (CMA) of the property and nearby sales. Use this to justify any offer you make.
Make sure that you are comfortable with the estimated monthly mortgage payments, similar recent home sales, and the suitability of the home for your needs.
Can I Make Two Offers at Once?
The short answer is no. Do not submit two simultaneous offers unless you are prepared to buy two properties.
When you submit an offer, you give the seller a deadline to respond. You must wait to make another offer elsewhere because if this seller accepts your offer without any changes, you’re obligated to complete the purchase.
If you make two offers at once and both are accepted without a counter-offer, you are obligated to buy both properties . If you can’t do that, one seller will probably sue you. Potentially costing you thousands of dollars in legal fees, damages, and penalties.
So, choose the property you like best and that most closely fits your requirements. If that seller doesn’t accept your offer as written, you can continue to negotiate for that property or make an offer on another one.
Don’t worry about FOMO when buying a home in Chicago. If one doesn’t work out there is always another that will work for you. I’ve had this happen to several buyers and the second property ends up ultimately being their favorite! Sometimes life works in mysterious ways.
Making an Offer When You Have to Sell a Home First
“Do I sell first or find a property I want to buy first?” That’s a common question.
My answer depends on your comfort level.
Depending on what the real estate purchase contract says, you may have to list your home right away once you have an offer. A five day deadline is common.
Personally, I recommend listing your current property and searching for the new property simultaneously. Sellers who are also buyers need to familiarize themselves with the current market.
Should they find a home they like, they should put an offer on it before it goes under contract with someone else — and therefore, they should prepare to list their home on very short notice.
There are different risks and stress when you buy and sell at the same time or separately.
Sell your current home first removes the stress of trying to sell with a deadline. But then you’ll be trying to buy on a deadline. You might not find something you like or close soon enough. And then you’ll have to move twice.
If you decide to buy first and then cannot sell a current home, you may lose your first choice and find yourself house-hunting again.
Whatever you decide, be sure to take a look at the market first, gauge the supply and demand situation and make your decision. In a hot seller’s market you may want to buy first. In a slower buyer’s market, it probably makes sense to sell first. And line up a rental just in case.
Negotiating Your Offer
When you submit an offer, the seller can do one of three things:
- Reject your offer or ignore it which is the same as rejecting it.
- Accept your offer with no changes, which obligates you to go forward with the purchase.
- Counter your offer, which means you can walk away, accept the counter or counter with conditions of your own.
This process can go back and forth. But if it’s a hot seller’s market you’ll not wish to provide too many opportunities for the seller to walk away.
When buying a home in Chicago, there is usually an attorney review period after signing the contract. Five business days is typical. You, the buyer, would have five days to conduct a home inspection.
After the inspection report comes back, the buyer, agent, and attorney work together to arrange for repairs or credits for repairs.
If the buyer and seller cannot come to terms, the contract may become null and void.
Can I Change My Mind and Back Out of a Purchase?
It’s not against the law to change your mind, but you’ll probably have to compensate the seller. The penalties may be very steep depending on the contract terms.
If you cannot proceed because of unmet contingencies — if your mortgage approval falls through because you lose your job for instance, or your home doesn’t sell — you can back out without penalty. That’s assuming that your earnest money deposit is refundable (it would be unless you specify that it’s not refundable, which could happen if you have to compete with other buyers).
If you just back out because you changed your mind, you will almost certainly lose your earnest money and possibly incur other penalties. That will depend on your contract and how much damage you cause your seller by backing out.
The Home Appraisal
After the inspection is complete, if you are financing, your lender will order an appraisal. Even if you’re paying cash, you should order one to protect yourself and make sure that the property value matches the sales price.
Once appraiser submits the appraisal, the lender reviews it and (hopefully) approves the value. Even if the appraisal comes in higher than the sales price, the lender bases your loan amount on the sales price.
If the value of the appraisal comes back lower than the loan amount, the lender bases the loan amount on the lower appraised value, not the sales price. You can renegotiate the sales price based on being unable to finance the home at that value or choose to proceed with a higher down payment.
That’s why you need to negotiate carefully. Without an appraisal or financing contingency, you could get stuck overpaying for property that does not appraise for the sales price.
Before closing, you should purchase homeowners insurance (your lender requires it), transfer utilities, forward mail, and arrange movers. A day prior to closing or the day of closing, you should conduct a final walkthrough with your agent. The purpose is to make sure the property is in the same condition it was when you first made the offer.
Here is a brief checklist of things you should look for and do:
- Make sure all windows and doors (including garage) open and close.
- Look up (ceiling) and down (flooring).
- Look for any cracks, scratches, and other potential issues.
- Turn on all faucets and flush toilets.
- Turn on appliances if possible (electricity may not be turned on yet).
- Take any measurements for refrigerator, furniture, window treatments, TV, etc.
Schedule utilities to be turned on for a day of closing or move-in.
Ideally, you’ll get a copy of your closing documents a few days in advance so you can review them without pressure. Ask your mortgage lender to provide them for you. There should be no surprises when you get to the title company.
Closing occurs when you sign off an a final set of documents. That normally includes a final loan application. You’ll get a package of documents transferring the property to you and the money to the seller, real estate agents, and other third parties who have worked on the transaction.
The closing usually takes place at a title company’s office. It usually takes an hour or two. You’ll sign your documents, receive a copy of your paperwork and pay your down payment and closing costs.
Then you get the keys!
Buying a Home in Chicago: About the Author
Julie Hayward is the author of this article, Home Buying Process Chicago. Julie is a veteran prominent Real Estate Agent in Chicago. She is the owner, President, CEO, and managing broker for EDGE REALTY LLC and one of the most knowledgeable realtors in Illinois. Julie Hayward has published her first book, OPPORTUNITY KNOCKS, which will be released within the next few weeks. Gustan Cho Associates is one of Julie’s greatest fans and we are lucky and blessed to have Julie Hayward as a contributing associate editor and writer.