HOME BUYER INFORMATION
Buying
Your New Home From Start to Finish
Choosing a home can be one of the
most exhilarating — and stressful — experiences
of your lifetime. Here are a few ground rules
for negotiating a successful contract and following
through to a smooth settlement.
Using
a Broker
Real estate agents are one of your
best resources for information and helpful advice
on many aspects of home buying. However, real
estate industry precepts oblige agents to serve
the interests of the seller. While the agent’s
goal is to obtain a signed contract that is
fair to all parties, his or her primary interest
is to satisfy the seller.
Some real estate industry professionals
are moving away from this perspective to a more central position
between buyer and seller. Be sure that you’re comfortable
with whoever you choose to represent you.
Real estate professionals also may be helpful
in directing you to appropriate lenders, attorneys, title
companies or other settlement service providers. Ultimately,
it is your responsibility and your right to inquire about
fees and choose the service provider best suited to your needs.
It is generally worthwhile
to shop and compare. We encourage you to check
with your Credit Union first.
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Making
an Offer
This is it! You submit a signed real
estate contract to purchase what may become
your next home. There is no industry standard
contract. A real estate agent will help you
make modifications or additions to the seller’s
requested terms. The seller must agree to these
terms or counter for your agreement in order
for the contract to be binding (more on that
later).
Leave nothing to verbal agreement. Every
element of concern to you should be written into the contract.
Buyers can and do negotiate with sellers as to which party
will pay for certain settlement costs. When negotiating a
real estate purchase, nothing is set in concrete.
The success of your negotiations will depend
on a variety of factors such as:
- how eager the seller is to sell and you
are to buy
- the quality of the property
- how long the house has been on the market
- whether other potential buyers are interested
- how willing you are to negotiate for
lower costs.
Once you and the seller sign and initial
an amended document, you are agreeing to stated
conditions. This paper becomes your legally
binding contract. Read it carefully and be sure
that you understand it completely before signing.
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Negotiating
the Sales Agreement
Since there is no standard contract
for the sale or purchase of real estate, you
may want to provide for your interests by including
provisions for the following in your offer.
Inclusion of these items in writing helps avoid
unnecessary friction between buyer and seller
and potential settlement delays due to verbal
misunderstandings.
- Deposit. Spell out the
amount of “earnest money” you will be paying.
Normally, this deposit will only be refunded
if you don’t qualify for a mortgage and the
sale does not go through. If, for example,
you change your mind about the purchase, an
earnest money deposit is usually forfeited.
- Contingency on Financing.
Be specific about financing terms including
the total loan amount, date a second or third
mortgage is due as well as exact terms (for
example, a buy-down mortgage at 8.5% for three
years followed by a rate of 10% for the remaining
27 years.) Many contracts contain an
“alternative financing” clause which allows
buyers to accept financing other than that
written in the contract as long as it doesn’t
affect the seller’s net proceeds.
- Contingency on Inspection.
If you are concerned about the property having
structural defects, you may make the contract
contingent on a satisfactory building inspection
report. You will generally have to pay for
this inspection. Still, the peace of mind
is worth the cost in light of the importance
of this investment in your life.
- Termites. The contract
should require the seller, at his or her expense,
to pay for a termite inspection, removal of
any infestation and repair of damage if necessary.
At settlement you should expect a written
report stating that the property is free and
clear of any active termite infestation.
- Personal Property. Any
items not permanently attached to the dwelling
should be spelled out specifically if they
are to convey to you with the sale. These
include, but are not limited to: chandeliers,
draperies, rods, appliances, heating oil in
tank, swimming pool chemicals, firewood, storm
windows and doors and so on.
- Repair Work. Sellers are
responsible for having plumbing, heating,
mechanical and electrical systems in good
working order at the time of settlement unless
you agree to accept the property in “as is”
condition room by room. In addition, you and
your agent will conduct a walk-through
inspection a few days before settlement
to confirm that all systems and agreed-upon
repairs are satisfactory.
- Title Attorney and Insurance
Company. You may want to negotiate who will
pay for the title search service to determine
that the property’s title is free and clear.
As the buyer, you may have the right to select
an attorney or title company to perform this
search. More commonly, the lender will select
the search and settlement services providers.
- Miscellaneous Cost Divisions.
Spell out in your proposal how taxes, water
and sewer charges, premiums on existing transferable
insurance policies, utility bills, interest
on mortgages and rent (if there are tenants)
are to be divided between you and the seller
as of the date of settlement.
- Closing and Occupancy Date.
You may want to include an arrangement with
the seller for a daily rent-back amount for
any post-settlement time period in the event
that you cannot secure possession on the agreed
date.
Be sure that your sales contract also spells
out in detail the sales price of the home,
method of payment, time set for taking possession,
as well as all of the specifics outlined above
regarding deposits, inspections, conveying
personal property, and required repair work,
etc. This list is by no means complete, it
simply illustrates the importance of spelling
out details in the sales agreement.
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What
About Counter Offers?
When your real estate professional
presents any modified terms you have requested
to the sellers and their listing agent, this
is a contract presentation. Based on your proposed
conditions, the sellers may do one of several
things:
- accept your proposal as written
- make counter offers on unacceptable aspects
- reject your offer
The seller’s response will be presented
to you, the prospective homebuyer. You may then:
- accept their counter offer
- counter their offer with another
- reject their offer
This negotiation process goes on until both
seller and buyer have agreed to every term in the proposal.
When all parties agree, everyone initials each proposed modification
and signs the offer.
As the homebuyer, when you sign, you will
also submit a deposit to show that you are earnest about this
transaction. Appropriately, this deposit is called “earnest
money”.
Congratulations!
Now you have a contract. Remember,
we said that buying your new home is both exhilarating
and stressful. One reason is that the sales
transaction process can take anywhere from 45
to 90 days on average, after you’ve found your
dream home. You will find it less stressful
if you understand the scope of transaction components
and their approximate order of occurrence between
contract and settlement date.
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What
Happens Next?
Once you’ve found your dream home,
your schedule of events before settlement may
look like this:
- submit your sales agreement proposal
- receive and agree to counter offers,
if any
- sign a contract
- schedule home inspection, if required
in contract
- make addendums to contract, if required
- apply for a mortgage loan
- receive loan approval
- select a settlement agent (generally
handled by lender)
- secure title insurance (generally handled
by settlement agent)
- secure homeowner’s insurance
- conduct walk-through inspection
- attend settlement
- move in!
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What
Can I Expect from a House Inspection?
First of all, your inspector should
be a member of the American Society of Home
Inspectors. Then, expect a written report delivered
quickly — usually in just a few days. This service
can cost up to several hundred dollars.
Your house inspector should provide practical
returns citing potential problems in areas not
easily accessible to you as a home buyer such
as heating, roofing, plumbing, and electrical.
If serious structural problems or systems
defects are found, you may wish to add an addendum
to the contract or request the seller to reduce
the sales price to compensate for the deficiencies.
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What
are Good Faith Estimates?
When you apply for a mortgage loan,
the lender must provide you with good faith
estimates of settlement service charges based
on the lender’s experience.
Remember, these figures are only estimates.
Changing market conditions can cause these estimates
to change. Also a change in your settlement
date can affect the amounts of escrow and other
prepaid items.
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Your
Loan Application and Approval
There is a standard residential loan
application used by all lenders for real estate
loans. Application procedures vary from lender
to lender. Some require in person appointments,
others may take your information by phone. Your
lender will spell out application procedures
clearly up front.
Your lender likely has their own settlement
service providers or closing department to offer legal services,
title examination, title insurance and to conduct the settlement
itself. These services are paramount to a smooth real estate
transition, so it is critical that you are comfortable with
every aspect of your mortgage lender.
After the lender approves the mortgage,
you will receive a loan commitment letter stating the mortgage
amount, interest rate and length of loan term.
Now, the listing and selling real estate
professionals will coordinate a settlement date.
Your agent will send you a letter confirming
the date, time and place and a checklist of
everything you need to bring.
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The
Complex Business of Insurance
As a homeowner, there are several
types of insurance that you will want — or need
— to consider.
Title
Insurance
Title insurance provides protection
in the event any of a number of past actions
threaten the title to your property. Most lenders
require title insurance to protect their interests.
Be sure to ask about an “owners” policy
as well. A separate title insurance policy protects your interests
as homeowner against title actions. You may save money by
purchasing your policy at the same time the mortgage lender’s
policy is purchased.
Also, ask about a “reissue rate”. If the
property changed hands within the past several years, the
title insurance company may allow a lower premium because
the recent title search is still valid.
Homeowner’s
Insurance
Most lenders require a home buyer
to provide at settlement a one-year paid receipt
for a fire and hazard insurance policy, often
referred to as homeowner’s insurance.
The minimum coverage must equal the amount
of the mortgage. It is sometimes wise to secure insurance
in an amount greater than the mortgage amount on your home.
Such homeowner’s insurance may not protect
you in the event of flooding. In special flood-prone areas
identified by the Federal Emergency Management Agency, you
may be required by law to carry flood insurance on your home.
Such insurance may be purchased at low, federally subsidized
rates under the National Flood Insurance Program.
Private
Mortgage Insurance
Private Mortgage Insurance (PMI)
is often required by lenders on low down payment
loans (generally less than 20% down). Such a
policy guarantees the lender payment of a certain
portion of the loan balance in the event of
default and foreclosure.
If applicable, lenders also require you
to make monthly payments on this insurance along with your
principal and interest payment.
Mortgage
Life Insurance
Mortgage life insurance is optional
coverage which protects your family and estate
by paying off your loan in the event of your
death. Mortgage disability insurance is similar
in that it guarantees to make your mortgage
payments during the time you are disabled.
Many lenders offer this type of coverage
and allow automatic payments along with your
monthly loan payment. However, we urge you to
shop carefully. There may be more cost effective
ways to provide this protection for your family.
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What
Happens at my Walk-Through?
The walk-through inspection is conducted
several days before settlement to determine
if all the provisions agreed to in the contract
have been fulfilled.
It is up to the buyer to perform the walk-through
inspection, not the seller, and it is one of your most important
protections. The listing and selling real estate agents will
accompany you on this inspection.
The home seller should make sure all utilities
are on so that equipment and appliances can be operated.
Room by room, try all lights and switches. Turn on all faucets,
run showers, flush toilets, operate the furnace and central
air. Test stove burners, oven and broiler, as well as the
refrigerator, ice maker, and dishwasher. Complete washer and
dryer cycles. Open and close all doors and windows. In short,
try everything — even keys and fireplace flue.
Note all deficiencies. The selling agent
will coordinate with the listing agent to ensure that all
repairs are completed before settlement, if possible. Funds
may be withheld from the seller by the settlement attorney
for repairs of any deficiencies not corrected by settlement.
Upon receipt of bills and notification that
repairs are complete, the attorney will release
escrowed funds to the seller.
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Getting
Ready for Settlement
There are a number of costs associated
with closing or settling your real estate transaction.
These costs can be significant and may be easily
overlooked by a first-time home buyer. So, let’s
get a handle on them now.
Closing
Costs
These are costs associated with borrowing
the money for your mortgage, establishing the
loan and preparing the settlement documents.
Closing costs vary from state to state. Check
with your lender for an early estimate of closing
costs.
- The Costs of Borrowing Money. This includes
what some lenders call “discount points,” a one-time charge
to adjust the yield on the loan to what market conditions
demand. Each point equals one percent of the mortgage amount.
Two and one-half points on a $100,000 mortgage would cost
$2,500.
- The Costs of Establishing a Loan. These
might include the loan origination fee, appraisal fee, and
cost of credit reports.
- The Costs of Document Preparation. Title
costs pay for the search of public records to determine
if the property you want to purchase is free from any other
ownership or liens. Recording and transfer fees cover the
legal recording of the deed with the proper governmental
agencies as well as the transfer of taxes.
Settlement Service Charges - There also
are a variety of service charges for settlement services.
Not all lenders charge for all services. Define these cost
requirements with your lender early on.
Sales/Brokers Commission - This fee is usually
a percentage of the selling price of the house,
and is intended to compensate brokers or real
estate agents for their services. It is usually
paid by the seller. Custom or negotiated agreement
between the seller and the real estate agent
determine the amount of the commission.
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Items
Payable in Connection with Loan
These are the fees that lenders charge
to process, approve, and make the mortgage loan.
Loan Origination - Covers the lender’s administrative
costs in processing the loan. Often expressed as a percentage
of the loan. Generally the buyer pays the fee unless another
agreement has been stated in the sales contract.
Loan Discount - Often called “points,” a
loan discount is a one-time charge used to adjust the yield
on the loan to what market conditions demand.
Appraisal Fee - This charge pays for a statement
of property value for the lender. The lender needs to know
if the value of the property is sufficient to secure the loan.
The appraiser inspects the house and the neighborhood, and
considers sale prices of comparable houses and other factors
in determining the value. The appraisal report may contain
photos and other information of value to you. It will provide
the factual data upon which the appraiser based the appraised
value. Ask the lender for a copy of the appraisal report.
The appraisal fee may be paid by either the buyer or the seller,
as agreed upon in the sales contract.
Credit Report Fee - Covers the cost of the
credit report, which shows how you have handled other credit
transactions. The lender uses this report in conjunction with
information you submitted with the application regarding your
income, outstanding bills, and employment, to determine whether
you are an acceptable credit risk and to help determine how
much money to lend you.
Lender’s Inspection Fee - Covers inspections,
often of newly-constructed housing.
Private Mortgage Insurance Application Fee
- Covers processing the application for private
mortgage insurance.
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Items
Required by Lender to be Paid in Advance
You may be required to prepay certain
items, such as interest, mortgage insurance
premiums, and hazard insurance premiums at settlement.
Interest - Lenders usually require that
borrowers pay at settlement the interest that accrues on the
mortgage from the date of settlement to the beginning of the
period covered by the first monthly payment.
Private Mortgage Insurance Premium - Private
mortgage insurance protects the lender from loss due to payment
default by the homeowner. The lender may require you to pay
your first premium in advance on the day of settlement.
Hazard Insurance Premium - This premium
prepayment is for insurance protection for you
and the lender against loss due to fire, windstorm,
and natural hazards. This coverage may be included
in a Homeowner’s Policy, which insures against
additional risks that may include personal liability
and theft. Lenders often require payment of
the first year’s premium at settlement.
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The
All-Important Settlement Day
On the big
day, listing and selling real estate agents
will generally be present with seller and buyer
and the settlement attorney. An attorney will
review with you the deed of trust, mortgage
note, any lender forms and settlement sheet
outlining charges.
This is when you will sign papers obligating
you to pay the mortgage loan according to the agreed-upon
terms. Read all documents carefully to be fully aware of your
obligations as a homeowner.
This is also the time when buyer and seller
pay agreed-upon closing costs. Seller may receive back escrowed
or unused funds. You, the buyer, will pay the balance of the
down payment and your portion of closing costs with a cashier’s
or certified check. Both buyer and seller get copies of settlement
sheets for their records.
When the house keys are passed, congratulations
are in order. You are a homeowner now.
Take
advantage of AFCU's Anytime Advisor Interactive
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