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. 

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.

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.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.

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.

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!

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.

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.

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.

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.

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. — Use our walk-through checklist. 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.

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.

1. 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.
2. The Costs of Establishing a Loan. These might include the loan origination fee, appraisal fee, and cost of credit reports.
3. 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.

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.

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.

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!

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