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CONGRATULATIONS! You have decided to buy a new home. Let me help
you take this big financial step by describing the home buying, home
financing, and settlement process. Lenders and mortgage brokers are
required by federal law, the Real Estate Settlement Procedures Act ("RESPA"),
to give you a booklet with detailed information about the process. You
should receive it when applying for a loan, or within three business days
afterwards.
You probably
started the home buying process in one of two ways: you saw a home you
were interested in buying or you consulted a lender to figure out how much
money you could borrow before you found a home (sometimes called
pre-qualifying). The next step is to sign an agreement of sale with the
seller, followed by applying for a loan to purchase your new home. The
final step is called "settlement" or "closing," where the legal title to
the property is transferred to you.
At each of
these steps you often have the opportunity to negotiate the terms,
conditions and costs to your advantage. You will also need to shop
carefully to get the best value for your money. There is no standard home
buying process used in all localities. Your actual experience may vary
from those described here.
Role of the Realtor
As a client you are a "principal" engaging a Realtor
for professional advice and/or services. Your interests are protected by
the specific duties and loyalties of a fiduciary relationship. With
limited, fully-disclosed exemptions, the Realtor will advise, advocate and
negotiate exclusively for you in the purchase of your property.
The Realtor owes you, as a client:
Obedience: All of your lawful
instructions must be sought out and followed.
Loyalty: The Realtor will act only to
protect and advance your interests before his/her own, or those of the
unrepresented party.
Disclosure: All information which could
affect your interests in a transaction must be revealed to you in a timely
fashion.
Confidentiality: The Realtor must protect
all privileged information about you. This information must not be used
for the Realtor's own interest or those of another.
Accountability: All personal property or
money received on your behalf will be protected. At your request the
account must be rendered and all valuables returned.
Reasonable Care: The Realtor must protect
you from foreseeable harm and must exercise skill and competence in
promoting your best interests.
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Terms of the Agreement of Sale
Your Realtor
probably will give you a preprinted form of agreement of sale. You may
make changes or additions to the form agreement, but the seller must agree
to every change you make. You should also agree with the seller on when
you will move in and what appliances and personal property will be sold
with the home.
Sales Price. For most home purchasers, the sales price is the
most important term. Recognize that other non-monetary terms of the
agreement are also important.
Title. "Title" refers to the legal ownership of your new home.
The seller should provide title, free and clear of all claims by others
against your new home. Claims by others against your new home are
sometimes known as "liens" or "encumbrances." You may negotiate who will
pay for the title search which will tell you whether the title is "clear."
Mortgage Clause. The agreement of sale should provide that
your deposit will be refunded if the sale has to be canceled because you
are unable to get a mortgage loan. For example, your agreement of sale
could allow the purchase to be canceled if you cannot obtain mortgage
financing at an interest rate at or below a rate you specify in the
agreement.
Pests. Your lender will require a certificate from a
qualified inspector stating that the home is free from termites and other
pests and pest damage. You may want to reserve the right to cancel the
agreement or seek immediate treatment and repairs by the seller if pest
damage is found.
Home
Inspection. It is a good idea to have the home inspected. An
inspection should determine the condition of the plumbing, heating,
cooling and electrical systems. The structure should also be examined to
assure it is sound and to determine the condition of the roof, siding,
windows and doors. The lot should be graded away from the house so that
water does not drain toward the house and into the basement.
Most buyers
prefer to pay for these inspections so that the inspector is working for
them, not the seller. You may wish to include in your agreement of sale
the right to cancel, if you are not satisfied with the inspection results.
In that case, you may want to re-negotiate for a lower sale price or
require the seller to make repairs.
Lead-Based Paint Hazards in Housing Built Before 1978. If you buy
a home built before 1978, you have certain rights concerning lead-based
paint and lead poisoning hazards. The seller or sales agent must give you
the EPA pamphlet "Protect Your Family From Lead in Your Home" or other
EPA-approved lead hazard information. The seller or sales agent must tell
you what the seller actually knows about the home's lead-based paint or
lead-based paint hazards and give you any relevant records or reports.
You have at
least ten (10) days to do an inspection or risk assessment for lead-based
paint or lead-based paint hazards. However, to have the right to cancel
the sale based on the results of an inspection or risk assessment, you
will need to negotiate this condition with the seller.
Finally, the
seller must attach a disclosure form to the agreement of sale which will
include a Lead Warning Statement. You, the seller, and the sales agent
will sign an acknowledgment that these notification requirements have been
satisfied.
Other Environmental Concerns. Your city or state may have
laws requiring buyers or sellers to test for environmental hazards such as
leaking underground oil tanks, the presence of radon or asbestos, lead
water pipes, and other such hazards, and to take the steps to clean-up any
such hazards. You may negotiate who will pay for the costs of any required
testing and/or clean-up.
Sharing of Expenses. You need to agree with the seller about how
expenses related to the property such as taxes, water and sewer charges,
condominium fees, and utility bills, are to be divided on the date of
settlement. Unless you agree otherwise, you should only be responsible for
the portion of these expenses owed after the date of sale.
Settlement Agent/Escrow Agent. Depending on local practices, you
may have an option to select the settlement agent or escrow agent or
company. For states where an escrow agent or company will handle the
settlement, the buyer, seller and lender will provide instructions.
Settlement Costs. You can negotiate which settlement costs
you will pay and which will be paid by the seller.
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Shopping for a Loan
Your choice
of lender and type of loan will influence not only your settlement costs,
but also the monthly cost of your mortgage loan. There are many types of
lenders and types of loans you can choose. You may be familiar with banks,
savings associations, mortgage companies and credit unions, many of which
provide home mortgage loans. You may find a listing of some mortgage
lenders in the yellow pages or a listing of rates in your local newspaper.
Mortgage Brokers. Some companies, known as "mortgage brokers"
offer to find you a mortgage lender willing to make you a loan. A
mortgage broker may operate as an independent business and may not be
operating as your "agent" or representative. Your mortgage broker may
be paid by the lender, you as the borrower, or both. You may wish to ask
about the fees that the mortgage broker will receive for its services.
Government Programs. You may be eligible for a loan
insured through the Federal Housing Administration ("FHA") or guaranteed
by the Department of Veterans Affairs or similar programs operated by
cities or states. These programs usually require a smaller down payment.
Ask lenders about these programs. You can get more information about these
programs from the agencies that run them.
CLOs.
Computer loan origination systems, or CLOs, are computer terminals
sometimes available in real estate offices or other locations to help you
sort through the various types of loans offered by different lenders. The
CLO operator may charge a fee for the services the CLO offers. This fee
may be paid by you or by the lender that you select.
Types of Loans. Loans can have a fixed interest
rate or a variable interest rate. Fixed rate loans have the same principal
and interest payments during the loan term. Variable rate loans can have
any one of a number of "indexes" and "margins" which determine how and
when the rate and payment amount change. If you apply for a variable rate
loan, also known as an adjustable rate mortgage ("ARM"), a disclosure and
booklet required by the Truth in Lending Act will further describe the
ARM. Most loans can be repaid over a term of 30 years or less. Most loans
have equal monthly payments. The amounts can change from time to time on
an ARM depending on changes in the interest rate. Some loans have short
terms and a large final payment called a "balloon." You should shop for
the type of home mortgage loan terms that best suit your needs.
Interest Rate, "Points" & Other Fees. Often the price of a home
mortgage loan is stated in terms of an interest rate, points, and other
fees. A "point" is a fee that equals 1 percent of the loan amount. Points
are usually paid to the lender, mortgage broker, or both, at the
settlement or upon the completion of the escrow. Often, you can pay fewer
points in exchange for a higher interest rate or more points for a lower
rate. Ask your lender or mortgage broker about points and other fees.
A document
called the Truth in Lending Disclosure Statement will show you the "Annual
Percentage Rate" ("APR") and other payment information for the loan you
have applied for. The APR takes into account not only the interest rate,
but also the points, mortgage broker fees and certain other fees that you
have to pay. Ask for the APR before you apply to help you shop for the
loan that is best for you. Also ask if your loan will have a charge or a
fee for paying all or part of the loan before payment is due ("prepayment
penalty"). You may be able to negotiate the terms of the prepayment
penalty.
Lender-Required Settlement Costs. Your lender may require
you to obtain certain settlement services, such as a new survey, mortgage
insurance or title insurance. It may also order and charge you for other
settlement-related services, such as the appraisal or credit report. A
lender may also charge other fees, such as fees for loan processing,
document preparation, underwriting, flood certification or an application
fee. You may wish to ask for an estimate of fees and settlement costs
before choosing a lender. Some lenders offer "no cost" or "no point" loans
but normally cover these fees or costs by charging a higher interest rate.
Comparing Loan Costs. Comparing APRs may be an effective
way to shop for a loan. However, you must compare similar loan products
for the same loan amount. For example, compare two 30-year fixed rate
loans for $100,000. Loan A with an APR of 8.35% is less costly than Loan B
with an APR of 8.65% over the loan term. However, before you decide on a
loan, you should consider the up-front cash you will be required to pay
for each of the two loans as well.
Another
effective shopping technique is to compare identical loans with different
up-front points and other fees. For example, if you are offered two
30-year fixed rate loans for $100,000 and at 8%, the monthly payments are
the same, but the up-front costs are different:
Loan A - 2
points ($2,000) and lender required costs of $1800 = $3800 in costs.
Loan B - 2
1/4 points ($2250) and lender required costs of $1200 = $3450 in costs.
A comparison
of the up-front costs shows Loan B requires $350 less in up-front cash
than Loan A. However, your individual situation (how long you plan to stay
in your house) and your tax situation (points can usually be deducted for
the tax year that you purchase a house) may affect your choice of loans.
Lock-ins. "Locking in" your rate or points at the time of
application or during the processing of your loan will keep the rate
and/or points from changing until settlement or closing of the escrow
process. Ask your lender if there is a fee to lock-in the rate and whether
the fee reduces the amount you have to pay for points. Find out how long
the lock-in is good, what happens if it expires, and whether the lock-in
fee is refundable if your application is rejected.
Tax
and Insurance Payments. Your monthly mortgage payment will be
used to repay the money you borrowed plus interest. Part of your monthly
payment may be deposited into an "escrow account" (also known as a
"reserve" or "impound" account) so your lender or servicer can pay your
real estate taxes, property insurance, mortgage insurance and/or flood
insurance. Ask your lender or mortgage broker if you will be required
to set up an escrow or impound account for taxes and insurance payments.
Transfer of Your Loan. While you may start the loan
process with a lender or mortgage broker, you could find that after
settlement another company may be collecting the payments on your loan.
Collecting loan payments is often known as "servicing" the loan. Your
lender or broker will disclose whether it expects to service your loan or
to transfer the servicing to someone else.
Mortgage Insurance. Private mortgage insurance and government
mortgage insurance protect the lender against default and enable the
lender to make a loan which the lender considers a higher risk. Lenders
often require mortgage insurance for loans where the down payment is less
than 20% of the sales price. You may be billed monthly, annually, by an
initial lump sum, or some combination of these practices for your mortgage
insurance premium. Ask your lender if mortgage insurance is required and
how much it will cost. Mortgage insurance should not be confused with
mortgage life, credit life or disability insurance, which are designed to
pay off a mortgage in the event of the borrower's death or disability.
You may also
be offered "lender paid" mortgage insurance ("LPMI"). Under LPMI plans,
the lender purchases the mortgage insurance and pays the premiums to the
insurer. The lender will increase your interest rate to pay for the
premiums -- but LPMI may reduce your settlement costs. You cannot cancel
LPMI or government mortgage insurance during the life of your loan.
However, it may be possible to cancel private mortgage insurance at some
point, such as when your loan balance is reduced to a certain amount.
Before you commit to paying for mortgage insurance, find out the specific
requirements for cancellation.
Flood Hazard Areas. Most lenders will not lend you money
to buy a home in a flood hazard area unless you pay for flood insurance.
Some government loan programs will not allow you to purchase a home that
is located in a flood hazard area. Your lender may charge you a fee to
check for flood hazards. You should be notified if flood insurance is
required. If a change in flood insurance maps brings your home within a
flood hazard area after your loan is made, your lender or servicer may
require you to buy flood insurance at that time.
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Securing Title Services
Title
insurance is usually required by the lender to protect the lender against
loss resulting from claims by others against your new home. In some
states, attorneys offer title insurance as part of their services in
examining title and providing a title opinion. The attorney's fee may
include the title insurance premium. In other states, a title insurance
company or title agent directly provides the title insurance.
Owner's Policy. A lender's title insurance
policy does not protect you. Similarly, the prior owner's policy
does not protect you. If you want to protect yourself from claims by
others against your new home, you will need an owner's policy. When a
claim does occur, it can be financially devastating to an owner who is
uninsured. If you buy an owner's policy, it is usually much less expensive
if you buy it at the same time and with the same insurer as the lender's
policy.
Choice of Title Insurer. Under RESPA, the
seller may not require you, as a condition of the sale, to purchase title
insurance from any particular title company. Generally, your lender will
require title insurance from a company that is acceptable to it. In most
cases you can shop for and choose a company that meets the lender's
standards.
Review Initial Title Report. In many areas, a
few days or weeks before the settlement or closing of the escrow, the
title insurance company will issue a "Commitment to Insure" or preliminary
report or "binder" containing a summary of any defects in title which have
been identified by the title search, as well as any exceptions from the
title insurance policy's coverage. The commitment is usually sent to the
lender for use until the title insurance policy is issued at or after the
settlement. You can arrange to have a copy sent to you (or to your
attorney) so that you can object if there are matters affecting the title
which you did not agree to accept when you signed the agreement of sale.
Coverage & Cost Savings. To save money on title
insurance, compare rates among various title insurance companies. Ask what
services and limitations on coverage are provided under each policy so
that you can decide whether coverage purchased at a higher rate may be
better for your needs. However, in many states, title insurance premium
rates are established by the state and may not be negotiable. If you are
buying a home which has changed hands within the last several years, ask
your title company about a "reissue rate," which would be cheaper. If you
are buying a newly constructed home, make certain your title insurance
covers claims by contractors. These claims are known as "mechanics' liens"
in some parts of the country.
Survey. Lenders or title insurance companies often require a
survey to mark the boundaries of the property. A survey is a drawing of
the property showing the perimetr boundaries and marking the location of
the house and other improvements. You may be able to avoid the cost of a
complete survey if you can locate the person who previously surveyed the
property and request an update. Check with your lender or title insurance
company on whether an updated survey is acceptable. |
