Buying a Home — Legal & Financial Considerations
Your home is likely the biggest purchase you will ever make, so every aspect of the transaction deserves consideration. To avoid disappointment, some considerations should be addressed before you look at any property.
Is the Timing Right?
Are you likely to change jobs or be transferred within the next few years? Are your personal circumstances likely to change because of health, marriage, divorce, or children? Are you likely to get a significant raise, inheritance, or other financial windfall within the next couple of years? Does your credit rating need repair? Any of these situations could mean that any house you buy now might not be right for you in a year or two. Moving is expensive. It might be best to wait.
Financing
Do not fall in love with a house you cannot afford. If, like most buyers, you need a mortgage, get pre-approved before you start looking. Make an appointment with a mortgage lender. Start with your own bank, get recommendations from a friend or real estate agent, or check local papers for the types of mortgages being offered. Gather paperwork concerning all of your debts and savings, your income for the last two years, and the amount and source of your down payment. Don’t hide anything; lenders verify. But don’t be discouraged. Not all mortgages require 20 percent down. They are not always 30 years, and they are not always paid once a month. You might be able to get a lower interest rate (lower monthly payments) by improving your credit score before you apply, by saving for a higher down payment, by getting a co-signer, by taking an adjustable rate mortgage, or by paying “points.” Points, which are prepaid interest to “buy down” the monthly rate, are expressed as a percentage of the loan, so that two points on a loan of $200,000 would be $2,000.
Your lender will consider your monthly payment of principal and interest plus 1/12 of your annual property taxes and of your annual insurance bill to arrive at your monthly payment and determine whether you can handle the payment. For example, principal and interest on a 30-year, $200,000 loan at a 4.5 percent interest rate would be $1,013. If the property taxes are $3,600 per year, and the homeowner’s insurance will cost $900 per year, your lender will probably require that you pay $1,388 per month. Many lenders pay the taxes and insurance bill from this “escrow” each year to protect their interests.
But you have to consider much more than that monthly payment. Ask your lender to estimate closing costs, which may include payments for your credit report, loan documentation, appraisal, underwriting, attorney, inspections, points (explained above), title insurance, survey, deposits into your tax/insurance escrow, recording fee, and private mortgage insurance. Consider monthly costs that may be new to you. The home you choose may have a homeowners’ association and require payment of an HOA fee, or it may have utility bills higher than you now pay. Consider maintenance costs and whether transportation costs will increase as a result of a longer commute.
Focus on Location
Once you know what you can afford, identify a geographic area that matches your budget, keeping in mind the length of your commute, public transportation, and the quality of schools in the area. Consider existing uses. For example, an airport or railroad line might create noise, farms have odors, and schools and stadiums generate traffic. Consider what is planned for undeveloped land.
The best way to answer these questions is to consult a real estate agent. Without an agent, you will not have access to houses listed through the local multiple listing service. Use an agent who has worked in your target area and knows the neighborhoods. Get references from previous clients. Ask whether the agent will be working for you and paid by you, is paid by the seller, or is a dual agent. While it might be easier, financially, to work with an agent paid by a seller, agents in that situation sometimes find themselves in a conflict of interest. In addition to taking you to see appropriate houses, your agent can provide information about the sales prices of similar properties to help you determine what to offer, can recommend lenders, attorneys, home inspectors, and other professionals, and can prepare the contract, explain it to you, and handle negotiations with the seller.
Making an Offer
When you are ready to make an offer, consider including contingencies that would enable you to cancel the contract within a certain number of days. Typical contingencies include the sale of your current home as well as the completion of a home inspection, radon testing, pest inspection, and well and septic system inspections, approval of the contract and HOA documents by your attorney, approval of your mortgage and appraisal, and the seller’s ability to provide clear title and a clean survey.
After your offer is accepted, closing is typically scheduled for a date a few weeks in the future. Except in unusual circumstances, closing is when you deliver the money and get the keys. During the time between contract and closing, in addition to preparing to move, calling the utility companies, and complying with your lender’s instructions for finalizing the loan, you will review inspection reports and possibly the survey. Decide, and notify your attorney or agent, how you want to hold title.
Meanwhile, the seller is preparing to deliver clear title by removing liens against the property. On the day of closing, the seller’s mortgage will be paid off, and yours will be recorded as a lien against the property. The seller may also have contractors’ liens for work done on the house, tax liens, or judgment liens such as for the settlement of a divorce agreement. Be sure to talk to your attorney, your lender, or your agent about what evidence you will receive at closing that these liens have been cleared. In many states, you will receive a title insurance policy.
Immediately before closing, conduct a final inspection. You will also have to obtain a cashier’s check in the appropriate amount, a certificate of insurance, and other documents required by your lender or title insurer. In some areas, the buyers and sellers attend an actual closing meeting at the office of an attorney, a title company, or the lender. In other locations, it is more common that the parties deposit the required documents and checks in advance with an escrow agent, who will then complete the transfer. Ask your attorney or agent to guide you through this.
