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How to Buy a Home: An Overview

Posted by Anonymous

Buying a house is typically cited as one of life's most stressful events and with good reason. Whether it is your first home or the place to which you are going to retire, there is a lot to think about. First, a potential buyer must think about the condition of the house by carefully reviewing the seller's disclosures and the home inspection report. Next, a potential buyer must consider the financial obligations of owning a home including applying for and being able to pay a mortgage, property taxes and property insurance. If a buyer clears those hurdles then the next thing to consider is all of the steps involved in the house buying process. Then, once the sale is complete, homeowners should be aware of how to handle neighbor disputes and homeowners' association issues.

By carefully considering the issues involved in buying a home and maintaining home ownership, a home owner can provide security for his or her future and avoid potential litigation. A prospective homeowner can:

  • Apply for a Mortgage: While the specifics of applying for a mortgage vary from lender to lender, borrowers should expect to fill out a mortgage application that includes information about their income and allows the lender to obtain the prospective buyer's credit reports. A lender may provide you with a pre-approval letter based on in the information in the mortgage application. The pre-approval letter will provide you and a seller with assurance that a bank will lend you a specific amount for a mortgage if the home meets the bank's qualifications. Once your offer to purchase a specific property has been accepted by a seller, banks typically want a home appraisal completed so that they can determine if the house is worth enough to secure the loan. Your offer to purchase property should contain a contingency clause allowing you to back out of the sale without penalty if your mortgage is not approved.

 

It is important to provide accurate data on your mortgage application. If you lie on your application and your lender discovers the fraud after the loan has been approved then your lender can demand immediate payment in full of the loan, you may be required to pay significant fines and serve jail time.

 

  • Understand the Costs of Owning the Home: Before you make an offer to purchase property it is important to get a copy of the most recent tax assessment on the property and to obtain home insurance estimates since you will be required to pay those expenses in addition to your mortgage payment. The mortgagee, or lender, may require that the money be held in escrow for you so that they can be assured that your tax and insurance obligations will be met. If you do not pay your taxes or your home insurance premiums then you could lose ownership of your property in a legal proceeding brought by your lender or your local government entity which collects property tax (typically a municipality, town or county).

 

  • Make an Offer to Buy Property Contingent on Certain Factors: Once you have found a home that you want to purchase you will need to make the seller an offer to purchase the property. The offer will, of course, include your proposed purchase price. It should also include certain contingencies that will allow you to back out of the agreement. Common contingencies include a substantial problem found during a home inspection, the inability to secure a mortgage on the property by a date certain or the inability to sell your existing home by a date certain. If any of these contingencies occur then you have the right to back out of the sale and to take back any deposit or earnest money that you have put down toward the purchase of the property. If you back out of the sale for any reason other than a contingency included in your offer to purchase the property then you lose the deposit that you put down toward the purchase of the property.

 

  • Have a Home Inspection: It is important to have a qualified home inspector conduct a home inspection and provide you with a home inspection report. If a substantial problem is found and the seller is unwilling to correct that problem then you may be entitled to back out of your contract to purchase the home provided that your offer to purchase the property was contingent on a successful home inspection. You will likely be required to notify the seller of the specific problems found in your home inspection report if you are using those problems as the reason to back out of your contract. The seller will then have the opportunity to fix the problem, offer you money so that you can fix the problem or accept your withdrawal of your offer to purchase the property. If you do not have the home inspection completed within the time frame stated in your offer to purchase the property then your right to back out of the deal and recover any deposits you put down on the property will be null and void. Your choices will then be to purchase the property with the defects or forfeit the money that is being held in escrow for closing.

 

  • Review Seller Disclosure Statements: Most states require sellers to disclose known material defects in their home that could affect a buyer's use and enjoyment of the property. A description of material, or substantial defects, are usually provided to prospective buyers in the form of seller disclosure statements. Typically, you have a time certain (usually a few days) to review the seller's disclosure statements and decide whether you want to go ahead with the agreement to purchase the property. If you do not want to go ahead with the purchase then you need to notify the seller in writing of your decision.

 

  • Protect the Title to the Property: buying a home is a large investment. Accordingly, it is important to protect your interest in and title to that home. Prospective buyers should have a title search completed and purchase title insurance to protect their property interest in the home. A title search will reveal any encumbrances on the ownership of the property. Specifically, it will confirm that the seller has the legal authority to sell the property to you, it will inform you of any easements, restrictions or allowances on the property and it will report on any unpaid mortgages, taxes or other liens on the property. If the title search comes up with a legal issue that prevents you from taking clear title to the property then you may be able to back out of your agreement to purchase the property. However, even if the title search comes back clear it is important to purchase title insurance. Title insurance is typically a onetime expense that protects your legal interest in the property should something have been missed in the title search process.

 

  • Understand Escrow and Closing: Escrow is money that is held by a neutral third party until the time that the sale is complete. Buyers pay a certain amount of money into escrow when they make their offer to purchase the home and again when a purchase and sale agreement is signed. This amount, sometimes known as "earnest money" or the "down payment" is held in escrow until closing when the buyer takes title to the property. At closing, all escrow monies are released, the seller is paid in full and the buyer takes legal title to the property.

 

The purpose of escrow is to protect both the seller and the buyer. The seller is assured of the buyer's good faith in purchasing the property and the buyer is assured that if one of the contingencies in the offer to purchase should need to be exercised that the buyer will get his money back. For example, if the buyer is unable to secure a mortgage or a home inspection reveals substantial defects then the buyer will be able to reclaim the money that was put in escrow. However, if the buyer decides not to purchase the property for a reason other than that specifically described in the offer to purchase the property then the seller can keep the escrow money even though the buyer will not be purchasing the property. The escrow money is usually held by a neutral third party and any disputes about the escrow may be handled by the parties' attorneys and a neutral escrow agent.

 

  • Obtain Homeowner's Insurance: Homeowner's insurance is important to protect your investment and is required by mortgage lenders. If you have a mortgage then you will be required to obtain a home insurance binder prior to closing. That binder is the insurance company's commitment to insure the property once you take ownership. If an accident that is covered by the policy should happen then the insurance company will pay the amount of the policy. The funds need to first be used to satisfy the mortgage on the property and any excess funds will be provided to the homeowner. It is important to review your policy to determine what natural disasters are covered before signing the insurance agreement. If you live in a flood plain or an area prone to hurricanes, for example, those type of disasters may not be included in your policy or may only be available for an additional cost.

 

  • Own Property Jointly : If you want to own property jointly, with a spouse, or another person, then both potential property owners will need to make the offer to purchase the home , obtain a mortgage and insurance. Different types of joint ownership include:

    • Tenancy in Common: owners of a property purchased in this manner each own distinct shares or percentages of the property. Owners have no claims on the property interest of other owners. Thus, each owner has the right to mortgage, sell and bequeath the property to whomever he chooses. This can create problems for real property owners who may be left dealing with owners whom they never intended nor anticipated.

    • Joint Tenancy with Rights of Survivorship: This can be created if all parties receive title at the same time, on the same deed, in the same proportion and with the same right of possession. Unlike tenancy in common, when a joint tenant dies the other owners inherit that owner's share of the property. In some jurisdictions, if one owner sells his share to a third party then the joint tenancy will be broken and the owners will become tenants in common. If the joint tenants are not related and have different estate plans and goals then this form of ownership may unfairly benefit the last surviving owner of the joint tenancy.

    • Tenancy by the Entirety: this form of ownership is held by two spouses. Each spouse has an equal right to the property and the surviving spouse will inherit the property interest of the spouse who dies first. The spouses also share equally in any debt on the property. This is a common way for married couples to own property in the United States but does not allow the first spouse to die to choose whom to bequeath his or her property interest to upon death.

    • Community property: this form of ownership is only applicable to states that recognize community property. In community property states, spouses may each own an equal share of the home and be allowed to pass their 50% interest in the property to whomever they name in their will rather than automatically passing the interest to the surviving spouse. While this seems to take care of the problems created by tenancy by the entirety, it may create practical problems for the surviving spouse if the deceased spouse left his or her interest to a third party.

 

  • Settle Neighbor Disputes or Homeowners' Association Issues: Once you are settled in your new home disputes with neighbors or your homeowners' association may arise. You may try to prevent these problems by creating written agreements regarding potential issues such as fence maintenance if the fence is on shared property or if you are maintaining a common driveway. If problems cannot be prevented then you may be able to file a lawsuit to settle your disputes.

Many people buy a home thinking of the security that it can provide for their family. However, a home only provides financial and personal security for its owners if the contingencies described above are met. Therefore, it is important to follow each step in the home buying process, to thoroughly complete each document and to consult an attorney when necessary.

 

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