FOR BUYERS
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 Real Estate Broker
Frequently, the first person you consult about buying a home is a real
estate agent or broker. Although real estate brokers provide helpful
advice on many aspects of home buying, they may serve the
interests of the seller, and not your interests as the buyer. The most
common practice is for the seller to hire the broker to find someone who
will be willing to buy the home on terms and conditions that are
acceptable to the seller. Therefore, the real estate broker you are
dealing with may also represent the seller. However, you can hire your own
real estate broker, known as a buyer's broker, to represent your
interests. Also, in some states, agents and brokers are allowed to
represent both buyer and seller.
Even if the real estate broker represents the seller, state real estate
licensing laws usually require that the broker treat you fairly. If you
have any questions concerning an agent or broker, you
should contact your State's Real Estate Commission or licensing
department.
Sometimes, the real estate broker will offer to help you obtain a
mortgage loan. He or she may also recommend that you deal with a
particular lender, title company, attorney or settlement/closing agent.
You are not required to follow the real estate broker's
recommendation. You should compare the costs and services offered by other
providers with those recommended by the real estate broker.
Please note, in many areas of the country attorneys are not
normally involved in the home sale. For example, escrow agents or escrow
companies in western states handle the paperwork to transfer title without
any attorney involvement.
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.
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
downpayment. 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 downpayment
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.
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 perimeter 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.
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FOR SELLERS
Sellers click here to find the value of YOUR home FREE.
- First impressions are lasting.
The front door greets the prospect. Make
sure it is fresh, clean and scrubbed. Keep lawn trimmed and edged, and yard
free of refuse.
- Decorate for a quick sale
Faded walls and worn woodwork reduce appeal.
Why try
to tell the prospects how your home could look, when you can show him by
redecorating?
A quicker sale at a higher price will result. An investment in new kitchen
wallpaper will pay dividends.
- Let the sun shine in
Open draperies and curtains and let the prospect
see how cheerful
your home can be (dark rooms have no appeal).
- Fix that faucet!
Dripping water discolors sinks and suggests faulty
plumbing.
- Repairs can make a big difference
Loose knobs, sticking doors and
windows, warped cabinet drawers and other minor flaws detract from value.
Have them fixed.
- From top to bottom
Display the full value of your attic and other
utility space by
removing unnecessary articles.
- Safety first
Keep stairways clear. Avoid cluttered appearance and
possible injuries.
- Make closets look bigger
Neat, well-ordered closets show that space is
ample.
- Bathrooms help sell homes
Check and repair caulking in bathtubs and
showers. Make this room sparkle.
- Arrange bedrooms neatly
Remove excess furniture.
Use attractive bedspreads and freshly laundered curtains.
- Can you see the light?
Illumination is like a welcome sign. The
potential buyer will feel a glowing warmth when you turn on all your lights
for an evening inspection.
-
When the agent shows the house
Three's a crowd. Avoid having too many people present. The potential
buyer will feel like an intruder and will hurry through the house.
- Music is mellow. But not when showing a house
Turn off blaring radio
and television. Let the salesperson and buyer talk, free of disturbances.
- Pets underfoot?
Keep pets out of the way - preferably out of the house.
- Silence is golden.
Be courteous but don't force conversation with the
potential buyer. He or she wants to inspect your house - not pay a social
call.
- Be it ever so humble. Never apologize for the appearance of your home
After all,
it has been lived in. Let the trained real estate professional answer any
objections. This is their job.
- Stay in the background
The salesman knows the buyer's requirements and
can better emphasize the features of your home when you don't tag along.
You will be called if needed.
- Why put the cart before the horse?
Trying to dispose of furniture and
furnishings to the potential buyer before he has purchased the house often
loses the sale.
- A word for the wise
Let your REALTOR discuss price, terms, possession
and other factors with the customer. The REALTOR is eminently qualified to
bring negotiations to a favorable conclusion.
- Use your agent
Show your home to prospective customers only by
appointment through your agent. Your cooperation will be appreciated and
will close the sale more quickly.
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