HOME BUYING 101
Rogers Law Firm LLC
7 Church Street North
New Hartford, CT 06057
Telephone: (860) 379-9600
Facsimile: (860) 379-8560
www.rogerslawfirm.com
Dear Homebuyer:
When it comes to buying a home, there is a lot to do and a lot to remember throughout the entire process. We hope that this home-buying checklist will provide you with the information you need to smoothly maneuver your way from making an offer on a property through the actual closing!
Don’t go it alone - make sure your interests are protected every step of the way by keeping the lines of communication open with both your realtor and your attorney’s office. Buying a home is both an exciting and busy time…we hope it is an enjoyable experience for you!
Norman E. Rogers, Jr., Esq. Bethany L. Monda, Paralegal
nrogers@rogerslawfirm.com bmonda@rogerslawfirm.com
�� Prior to searching for homes, obtain a pre-approval letter from a mortgage company, bank or other mortgage lender. When you, as a buyer, are pre-approved for a mortgage loan,
sellers will often view your purchase offer more favorably.
�� After finding the home of your choice, your realtor will draft a Real Estate Contract
sometimes called a Purchase and Sale Agreement, and will submit your offer to the
seller. Make sure your realtor includes a 3- to 5-day attorney review period
as a contingency to the contract.
�� Have your realtor provide a copy of the fully signed Contract to your attorney as soon as the seller signs it. Your attorney will then have ample time to review the terms of the contract and advise both you and your realtor regarding any items of concern.
�� If you are purchasing a condominium: ask your realtor to request the condo resale documents as soon as possible following the signing of the Contract. Once you receive these documents, carefully review the rules and regulations of the condo association. If there are any rules or regulations you just can’t live with, you have five (5) days from the date you receive the condominium documents to terminate the Contract and have your deposit money returned to you.
�� Work with your loan officer to obtain a mortgage commitment. Your realtor and/or attorney can give you the names and phone numbers of local lending institutions that they recommend. The loan officer is the individual at your mortgage company who reviews your financial information and the property information to approve you for a mortgage. Provide the loan officer with the information they request as efficiently as you can so that the mortgage commitment letter will be completed by the Contract deadline. Most lenders allow the same attorney to represent both the individual borrower and the lender, which reduces the attorney’s fees and simplifies the closing. Obtain a “Good Faith Estimate” from your lender, which should include all fees and costs that will be charged by the lender.
�� Schedule all applicable inspections. Typically, this includes a home inspection (which focuses on the structure and mechanicals of the building), pest inspection, radon testing, well
Inspection (which includes a chemical analysis of the water, a determination of the
condition of the well system, and a test of the water pressure/quantity of water the well
is producing) and septic inspection. Other optional inspections which may or may not be
applicable are: asbestos inspection, lead inspection, central air conditioning inspection,
heating system/furnace inspection and swimming pool inspection. Inspections are
typically paid for by the Buyer and should be completed as soon as possible
following the signing of the Contract. Your realtor and/or attorney can provide you
with names of local inspectors.
�� Agree with the seller on inspection issues/repairs that will be taken care of by the seller. Once
the inspection results are in, there may be items that you would like to
request that the seller have repaired. You can submit these requests via
your realtor, in the form of a brief letter or memo. The seller has the option
to agree to some, all or none of your requests. Any items that the seller
does agree to take care of should be completed prior to closing, and you
should be provided, at the closing, with copies of paid receipts from the
professionals who did the work.
�� Carefully review the information contained in the mortgage commitment letter and provide a copy of the letter to your attorney to review before signing.
�� Contact your insurance agent or company and apply for homeowner’s insurance. Your insurance professional will help you to determine the amount of coverage you will need. Lenders typically require that the first year’s premium be paid prior to closing. Provide your attorney with the name and phone number of your insurance agent/company.
�� Speak with your attorney and obtain an estimate of your closing costs (any fees and
costs which will be paid by you at the closing). The Good Faith Estimate provided
by the lender usually does not include the fees and costs that will be charged by your attorney, and it’s good to have at least a general dollar amount early on to avoid last-minute panic over the amount of money you’ll need to bring to closing.
�� As you near your closing date, speak with your attorney to coordinate a date, time and location for the closing. Typically, the closing will occur at your attorney’s office at a time that will be mutually agreed upon by you, your attorney, the lender, the seller, and the seller’s attorney – coordinating that many people is sometimes difficult, so it’s best to be a bit flexible in your schedule that day.
�� Schedule your moving company for the date of the closing. Make sure that your movers know that they cannot begin unloading your personal belongings at your new home until the closing has been completed. Take into account the time that you are expected at your attorney’s office for the closing, and allow at least a full hour for the closing to take place.
�� Contact local utility/service companies to have service established to start on the day of closing. Typical utility companies that you should contact include:
o Electric
o Phone
o Gas, if applicable
o Internet
o Cable television
o Trash removal
o Fuel oil and/or propane provider
�� Contact your attorney the day before closing to obtain the amount of the check you’ll need to bring to closing, as well as who to make the check payable to. Any necessary funds should be in the form of a “bank” or “certified” check. Your attorney will typically be able to tell you the amount needed a day prior to closing. Your attorney being able to provide this information is, however, dependent on both the seller’s attorney and the lender getting the necessary information to your attorney in a timely fashion.
�� Coordinate your final walk-through of the property on the day of closing with your realtor. The property should be left in “broom clean condition” by the sellers. While the house may not be “sparkling,” there should not be any trash left in either the home or the yard. During the final walk-through, you should:
o make note of any damage to the property that did not exist when you originally made your offer;
o confirm that all personal property (ie., appliances, swing-sets, etc.) that were to be included in the purchase are still at the property; and
o check appliances to make sure they are in working condition.
Have your realtor call your attorney as soon as possible if there are any issues with the property at the time of your walk-through.
�� Attend the closing. Any individuals who are going to own the property or be a co-signor on the mortgage loan must attend the closing. Each person should have a driver’s license or other valid form of identification with them at closing due to strict regulations regarding identify verification imposed by federal law.
�� Breathe a sigh of relief and start moving in!!
What is Title Insurance? Is it necessary? How will it protect you?
Title insurance provides protection against financial losses which might result from title defects or claims against your property. There are two distinct types of policies: (1) the Owner Policy, which provides protection to the homeowner and their heirs, and (2) the Mortgagee Policy, which provides protection to the mortgage lender. Typically all mortgage lenders in the state of Connecticut require title insurance(which is paid for by the buyer). An Owner Policy is not required, but it is recommended. Itis advantageous to purchase both the Mortgagee Policy and the Owner Policy at the time of closing, which reduces the premium costs.
An Owner Policy provides two different types of coverage: first, it pays to defend the homeowner’s title to the property in a court of law, and secondly, it pays the cost to remove a defect in title on behalf of the insured. A homebuyer’s attorney, prior to closing, searches the town land records to determine the status of title to the property. At closing, a Warranty Deed is received from the seller, which promises that the seller is conveying good (clear) title to the buyer. However, title insurance provides two additional protections: first, if there is a problem with title, the title insurance company will pay the costs of making a claim against the prior owner, and secondly, there are often “hidden defects” (as described in the attached article, “Title Insurance for Homeowners”) which the seller is not responsible for but which could affect your title. Title insurance covers these problems.
The premium for title insurance is a one-time premium which is paid at closing by the buyer. Protection begins immediately upon the recording of deed and works backward in time. In other words, the policy insures any loss resulting from defects which occurred priorto your closing. Specifically excepted from the coverage of the policy are any items found on the land records during the title search(such as easements in favor of utility companies).
The Owner Policy protects (1) you, as long as you have an interest in the property, (2) your heirs’ interests in the property if the property is transferred to them, and (3) the warranties you give when you transfer the property. Owners typically purchase coverage in an amount equal to the purchase price of the property. The Owner Policy may include a provision that automatically increases the amount of coverage by ten percent (10%) of the original amount each year for the first five (5) years without additional cost.
Buying a home is typically one of the largest investments a person makes during their lifetime. In order to protect your interest in that property, as well as the marketability of the property at a possible later date, it is recommended that you obtain an Owner Title Insurance Policy and protect your investment!
Closing costs vary greatly and are dependent upon, among other things, the lender you choose, the type of mortgage loan you apply for, the amount of your down payment, the time of year in which you close, the attorney you use, and a host of other factors.
The following are the most typical closing costs that you will encounter in your purchase transaction – this is a non-exhaustive list and your lender should provide you with a “Good Faith Estimate” which will give you a better idea of the closing costs associated with your particular loan.
Lender Closing Costs
1. Loan Origination Fee. The loan origination fee is usually referred to as "points." One point is equal to one percent of your mortgage loan. Typically, the more you pay in points, the lower your interest rate.
2. Appraisal Fee. Since the property serves as collateral for your mortgage, the lender almost always requires an appraisal to determine the value of the property. The appraisal determines if the price you are paying for the property is justified by recent sales of comparable properties. The appraisal fee varies depending on the type of home you are purchasing (single-family, multi-family, commercial, condominium, etc.). Distinctive homes and homes with a higher value also may impact the appraisal fee. Appraisals for VA and FHA loans are also usually more expensive since they require the appraiser to inspect items that are not generally tied to the value of the home.
3. Mortgage Broker Fee. The fees charged by the mortgage broker, as opposed to the wholesale lender, are indicated separately on your settlement statement at closing. Wholesale lenders typically offer lower closing costs and lower interest rates to mortgage brokers than you can obtain directly, so you usually do not pay anything "extra" by using a mortgage broker.
4. Tax Service Fee. During the life of your loan you will be paying real estate taxes, either on your own or through your escrow account with your lender. Lenders often pay another company to monitor real estate tax payments and ensure that all payments are made and that there are no liens placed on the property due to back taxes.
5. Credit Report. Your lender will review your credit history as part of its underwriting process and will charge you a fee for obtaining your credit report.
6. Flood Certification Fee. The lender must determine whether or not your property is located in a federally designated flood zone and, if it is, you will be required to obtain flood insurance. A fee is usually charged to make that determination.
7. Document Preparation. Almost all lenders charge a fee for the preparation of your loan documents, whether they are drawn by the lender or by a separate document preparation company.
8. Underwriting Fee. Underwriting fees vary greatly from loan to loan and are not charged by all lenders.
9. Administration Fee. If an Administration fee is charged, there is typically no Underwriting Fee, and vice versa; however, at times both an Administration fee and an Underwriting fee are charged.
10. Wire Transfer Fee. Most lenders fund the loans by wire transfer to your attorney’s “clients’ funds account” and they often charge the fee to the borrower.
Items Paid in Advance to the Lender
1. Pre-paid Interest. Mortgage payments are typically due on the first day of each month. Since closings can occur on any day of the month, a certain amount of interest is paid at the closing which is the daily interest amount from the date of closing until the first day of the following month. For example, if you close on your property on 17th of the month, you will pay 13 to 14 days of pre-paid interest.
2. Homeowner's Insurance. Most lenders required that you pay the first year's insurance premium prior to closing. If you are buying a condominium, your condo association fees normally cover this insurance.
3. Mortgage Insurance. Mortgage insurance covers a portion of the losses experienced by the lender in cases where a borrower defaults on their loan, and this type of insurance is generally required by lenders if the buyers make less than a 20% down payment. Some loan programs require that the entire first year’s mortgage insurance premium is paid in advance at the closing.
Reserves Deposited with Lender
Most lenders require the establishment of an “escrow account”, also sometimes called an “impound account” with each loan. The money held in this account is still your money and the lender uses it to make the payments on your homeowner's insurance, property taxes, and mortgage insurance (if applicable). In addition to your monthly mortgage payment of principal and interest, you pay additional funds which are then deposited into your escrow account.
In this way, the lender aims to always have sufficient funds to pay your bills as they come due. It is sometimes possible to pay a fee to waive the necessity of an escrow account, which puts the responsibility on you as the homeowner to pay the real estate taxes and homeowner’s insurance premium whenever they are due.
1. Homeowners Insurance Impounds. The lender divides your annual premium by twelve to come up with an estimated monthly amount. Lenders require that a certain number of months’ worth of reserves are kept in your escrow account, and so typically collect two to three months of homeowner’s insurance at the closing.
2. Property Tax Impounds. How much you have to deposit towards taxes at closing varies depending upon the month during which your closing occurs. For example, if you close in November (property taxes are due in January), your deposit would be higher than for someone closing in August.
3. Mortgage Insurance Impounds. Most lenders allow this (if applicable) to be paid monthly. You may, however, be required to put several months’ worth of mortgage insurance as an initial deposit into your escrow account.
Non-Lender-Related Closing Costs
1. Closing/Escrow/Settlement Fee. Typically, an attorney charges a flat fee, which covers all of their work from the time they receive the contract until the actual closing has been completed, as well as any related post-closing work. Attorneys typically charge an additional fee to do a title search of the land records.
2. Title Insurance. Title insurance assures the homeowner that they have clear and marketable title to the property. Lenders require their own title insurance policy to insure that their mortgage is in first position. The costs vary depending on the purchase price of the home and the amount of the loan, but your attorney should be able to tell you the cost once you have a signed contract.
3. Recording Fees. Your deed and mortgage get recorded on the land records at the town hall. Fees vary depending on the number of pages of the deed and mortgage document.
4. Inspection Fees. These are fees paid prior to closing by the homebuyer to the various inspectors. Typical inspections, which are all optional but usually recommended, include a home inspection, pest/termite inspection, well inspection, radon inspection and septic inspection. Other inspections may include a central air conditioning inspection, heating system/furnace inspection, swimming pool inspection and lead/asbestos inspection.
5. Courier Fee/Wire Fee/Copy Fee. These are typically charged by the attorney to cover the costs they incur (1) in having the mortgage funds transferred into their account by bank wire, (2) in sending the loan documents via overnight service to the lender, and (3) in obtaining copies of necessary deeds, easements and/or maps from the land records to be able to ensure that you are receiving clear title to the property.
What kind of lender is "best?"
If you talk to a loan officer, he (or she) will probably say the lender they work for is "the best" and give you a list of reasons why. If you meet the same loan officer years later and he works for a different kind of lender, he will give you a list of reasons why that type of lender is better.
Most often a Realtor will direct you to a specific loan officer who has demonstrated a track record of service and reliability -- or a loan officer who works for a lender affiliated with their real estate office.
It is often more important to choose a good loan officer, not the institution. Loan officers have two jobs. One is to be your advocate in getting the loan approved. The other is to deliver quality loans. You want someone who has proven dependable and ethical in the past -- someone you can trust.
As for lending institutions, each type of lender has strengths and weaknesses. Quality within each branch or office can vary, depending on the loan officer, the support staff, and a variety of other factors.
PORTFOLIO LENDERS
Portfolio lenders are usually Savings & Loan institutions, and sometimes banks. They are called "portfolio" lenders because they tend to originate loans for their own portfolio (usually adjustable rate loans), not for resale in the secondary market. The distinction gets blurred because most portfolio lenders also engage in mortgage banking.
They will often pay more compensation to their loan officers for originating a portfolio product than for originating a fixed rate loan. You may also find that they are not as competitive as mortgage bankers and brokers in the fixed rate loan market, though this is no longer a hard and fast rule.
It is often easier to qualify for a portfolio loan, so they are often a lender of "second resort" for those who cannot qualify for a fixed rate loan. If a loan officer is steering you towards "sub-prime" loans, it might be wise to check out a portfolio lender first.
Portfolio lenders also can serve as "niche" lenders because certain things are more important to them than meeting the more standardized underwriting guidelines of a mortgage banker. An example would be a savings & loan which is more concerned with an individual's savings history than being able to fully document income.
If you apply for a loan with a portfolio lender and you are declined, that's it. You're done. If you still think you should be able to qualify for a loan, you have to start over somewhere else.
BANKS and SAVINGS & LOANS
Their major strength is that you will recognize their name. Banks and Savings & Loans often operate as portfolio lenders, but as the lending world has changed, most also operate as mortgage bankers and sometimes brokers.
MORTGAGE BANKERS
If we are talking about the larger mortgage bankers, you can count on them having several strengths. For the biggest ones, like Countrywide or Wells Fargo, you will recognize the "brand name."
copyright 2000 by Terry Light and RealEstate ABC, modified 2002
Usually, larger mortgage bankers are much better at promoting special first time buyer programs, cooperating with states and local governments. These programs will have slightly lower interest rates and costs than the current market rate. To qualify for these programs, your income must usually fall below a median average for the area and you must not have owned your residence for the last three years.
Mortgage bankers may have problems just because they are "too big" or they may operate like well oiled machines. A lot depends on the branch or office you deal with.
If you're applying for an FHA or VA loan, sometimes mortgage bankers are more adept at some of the intricacies involved than a mortgage broker. For example, the tract you are buying in may not be "approved" by FHA or VA. Mortgage bankers often have more clout in getting it approved than would a small mortgage broker.
If your home loan is declined for some reason, many mortgage bankers allow their loan officers to broker the loan to another institution. However, because your loan officer is so used to promoting his own company's product, he often loses track of the "niches" offered by certain wholesale lenders.
MORTGAGE BROKERS
Basically, wholesale lenders use mortgage brokers as their loan officers. They offer a lower rate to the broker, the broker adds on his compensation, and the rate is usually about the same as you would get using a mortgage banker. Sometimes the rate is lower, sometimes higher, depending on how much compensation the broker adds on.
Mortgage brokers also learn the "hot points" of various wholesale lenders and can handpick the lender for a borrower which may be unique in some way. He will be able to submit your loan to either a portfolio lender or a mortgage banker. Another advantage is that, if a loan gets declined for some reason, they can simply repackage the loan and submit it to another wholesale lender.
One additional advantage is that mortgage brokers tend to attract a high number of the most qualified loan officers. This is not universal, because mortgage brokers also serve as the training ground for those just entering the business. If you have a new loan officer and there is something unique about you or the property you are buying, there could be a problem on the horizon that an experienced loan officer would have anticipated.
A disadvantage is that mortgage brokers sometimes attract the greediest loan officers, too. They may charge you more on your loan which would then nullify the ability of the mortgage broker being able to "shop" for the lowest rate.
copyright 2000 by Terry Light and RealEstate ABC, modified 2002
Title Insurance Compared to Other Insurance
The basic function of any type of insurance is to shift risk from one party to another for a fee or premium. An automobile owner pays a premium to an insurance company to assume the risk of loss for any accident in which the owner might become involved. Insurance companies survive by correctly calculating the balance between income and claims losses.
Before any insurance company agrees to insure a party, the company performs a process of evaluating the level of risk. This process is generally called "underwriting ".
Title insurance companies insure parties against loss resulting from matters affecting title to real property. These companies evaluate the history of the ownership of the property and charge an owner and/or a lender a premium to insure that there is nothing in that history that will result in a loss to the insured. Unlike other forms of insurance, title insurance relies on a single premium paid at the time of acquisition of the interest in the property.
Title Insurance for Owners
If you obtained a mortgage loan in order to purchase your new home, the lender probably required you to purchase a title insurance policy in its name to insure the validity of its mortgage as a lien on your property. THAT POLICY DOES NOT PROVIDE ANY COVERAGE FOR YOU.
Owners desiring title protection must purchase a separate policy insuring their ownership interest. The essence of the owner policy is that it insures the owner against loss by reason of the status of the record title being other than as stated in the policy, subject, of course, to certain standard exclusions and exceptions relating to the particular property. Rates for owner title insurance policies are generally higher than for loan polices because of the higher risk and because the policy insures the entire value of the property rather than just the loan amount.
The current form of owner policy in general use is the 1992 American Land Title Association (ALTA) owner title insurance policy. Recently, the title insurance industry has introduced an optional, expanded coverage policy which is available at higher rates than the standard policy. This policy is based on the 1987 ALTA Residential Title Insurance Policy with additional coverages not contained in either ALTA policy.
Owners desiring to purchase title insurance for themselves now have the option to purchase the standard or the expanded form of coverage. This brochure provides general information about the coverages afforded by each policy. It is not an alternative statement of the coverages stated in the policies.
The Standard Owner Policy
This policy provides the basic coverages for persons desiring to protect their interest in the property. It insures the following:
1. You are the true owner of the property.
2. There are no defects, liens or encumbrances other than those that are listed in the policy.
3. The title you acquired is marketable and cannot be rejected by a subsequent buyer as being impaired by some defect that existed at the time you purchased the policy.
copyright 1999 CATIC © designed by Third Mind, Inc. 1999 © CATIC disclaimer
4. You have a legal right of access to the property from a public street or private right of way.
5. The company will defend your title if it is challenged and will pay costs, attorneys' fees and expenses to defend you against any claims made against your title which fall within the coverage of the policy.
6. CATIC increased the coverage by 10% each year for the first five years without additional cost.
The coverage under both the standard and expanded coverage policy continues in force for as long as you have an interest in the property. That means that you will also be covered after you sell the property and convey the title by warranty deed to the new owners. Should the subsequent owners later make a claim against you for some problem that would be within the coverage of your policy, the company will provide the protections listed in Paragraph 5 above.
The Expanded Owner Policy
This policy provides the coverages described in Paragraphs 1 through 5 of the standard owner policy description to you or your trustee plus the following coverages:
1. Use of the land for a single-family dwelling is not prohibited by zoning/recorded restrictions.
2. There are no pre-existing leases, contracts or options to purchase affecting your title or easements affecting your property.
3. No work or materials were provided to your property before acquisition for which a lien can be filed.
4. You cannot lose title to your property through forfeiture or reversion because of a preexisting violation of recorded restrictions.
5. You cannot be forced to remove an existing structure on the property because of a violation of zoning or private restrictions or because no building permit was issued for the structure.
6. There are no pre-existing violations of any recorded restrictions affecting your property.
7. You have a legal right of access to the property by both foot and vehicle.
8. Protection against loss involving:
a. Ownership claims of others based on forgery before or after acquisition of title.
b. Claims to divest you of ownership because of a pre-existing violation of restriction.
c. Claims of others to limit the use of your property based on a recorded restriction.
d. Refusal to fulfill a purchase contract, lease or make a mortgage loan because of prepurchase violation of restrictions.
e. Someone else builds on your property.
f. Inability to sell because of violations of subdivision regulations.