BUYING AND FINANCING A HOME

It’s about time; you have decided to buy a new home.  This article will help you take this big financial step by describing the home buying, home financing, and settlement process.  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 enter into 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 of 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. This article summarizes the general steps taken in buying a home.

A. 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. 

Even if the real estate broker represents the seller, state real estate licensing laws usually require that the broker treat you fairly. 

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.

B. Selecting a Qualified Attorney

Before you sign an agreement of sale, you should hire a qualified attorney to look it over and tell you if it protects your interests.  An attorney will help you prepare for the closing and guide you through the entire process.  In choosing an attorney, you should investigate and ask what services will be performed and for what fee. Find out whether the attorney is experienced in representing home buyers.  You may wish to ask the attorney -what is the charge for negotiating the agreement of sale, reviewing documents and giving advice concerning those documents, for being present at the closing?

C. Terms of the Agreement of Sale

Your attorney will review the sales agreement.  He or she will probably make changes or additions to the sales agreement, however the seller’s attorney must agree to every change he or she makes.  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.

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.”

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.  Your attorney will most probably 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, by a licensed engineer.  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. 

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.

D. Looking For The Right 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.  However, the best way to look for a lender is to ask your friends who have recently purchased a house, or in the alternative to ask your attorney.

Mortgage Brokers.  Some companies, known as “mortgage brokers” offer to find you a mortgage lender willing to make you a loan.  Your mortgage broker may be paid by the lender, you as the borrower, or both.

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.

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 look 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 usually requires you to obtain certain settlement services, such as a new survey, mortgage insurance and 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.

Title insurance.  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. 

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. 

One of the purposes of RESPA is to help consumers become better shoppers for settlement services.  RESPA requires that borrowers receive disclosures at various times.  Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.

Good Faith Estimate of Settlement Costs.  RESPA requires that, when you apply for a loan, the lender or mortgage broker give you a Good Faith Estimate of settlement service charges you will likely have to pay. If you do not get this Good Faith Estimate when you apply, the lender or mortgage broker must mail or deliver it to you within the next three business days.

Be aware that the amounts listed on the Good Faith Estimate are only estimates.  Actual costs may vary.  Changing market conditions can affect prices.  Remember that the lender's estimate is not a guarantee.  Keep your Good Faith Estimate so you can compare it with the final settlement costs and ask the lender questions about any changes.

Escrow Account Operation & Disclosures.   Your lender may require you to establish an escrow or impound account to insure that your taxes and insurance premiums are paid on time.  If so, you will probably have to pay an initial amount at the settlement to start the account and an additional amount with each month’s regular payment.  Your escrow account payments may include a “cushion” or an extra amount to ensure that the lender has enough money to make the payments when due. 

At the closing, the party servicing your loan must give you an initial escrow account statement.  That form will show all of the payments which are expected to be deposited into the escrow account and all of the disbursements which are expected to be made from the escrow account during the year ahead.  Your lender or servicer will review the escrow account annually and send you a disclosure each year which shows the prior year’s activity and any adjustments necessary in the escrow payments that you will make in the forthcoming year.