You’ve decided to buy a new home — congratulations! This article will 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 under the Real Estate Settlement Procedures Act (“RESPA”) to give you this information. You should receive it when applying for a loan, or within three business days afterward. Real estate brokers frequently hand out a booklet, as well. 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. This article will take you through the general steps to buying a home in order to eliminate, as much as possible, the mysteries of the settlement process.
Buying and Financing a Home
The 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 the behavior of 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.
Selecting an Attorney
Before you sign an agreement of sale, you might consider asking an attorney to look it over and tell you if it protects your interests. If you have already signed your agreement of sale, you might still consider having an attorney review it. An attorney can also help you prepare for the settlement. In some areas, attorneys act as settlement/closing agents or as escrow agents to handle the settlement. An attorney who does this will not solely represent your interests, since, as the settlement/closing agent, they may also be representing the seller, the lender, and others, as well.
Please note that 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.
If choosing an attorney, you should shop around and ask what services will be performed for what fee.
Find out whether the attorney is experienced in representing home buyers. You may wish to ask the attorney questions such as:
What is the charge for negotiating the agreement of sale, reviewing documents, and giving advice concerning those documents, as well as for being present at the settlement, or for reviewing instructions to the escrow agent or company?
Will the attorney represent anyone other than you in the transaction?
Will the attorney be paid by anyone other than you in the transaction?
Terms of the Agreement of Sale
Before you sign an agreement of sale, here are some important points to consider. The real estate broker probably will give you a pre-printed 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.
Some important terms you should become familiar with include:
sale 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: The “title” refers to the legal ownership of your new home. The seller should provide the 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. Never hire an inspector who is not a member of InterNACHI. Unqualified inspectors charge less but they will cost you in the long run. 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 titled “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 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 or company: 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.
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.
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 and 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.
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” payment. You should shop for the type of home mortgage loan terms that best suit your needs.
Interest Rate, Points and 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% 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 (a “pre-payment penalty”). You may be able to negotiate the terms of the pre-payment 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 a 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 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 $1,800 = $3,800 in costs
Loan B: 2-1/4 points ($2,250) and lender-required costs of $1,200 = $3,450 in costs