Cheat Sheet for First Time Homeowners
By Aileen Torrens, Real Estate Closings, Transactions, & Litigation Attorney
Buying your first home is a milestone that can be both exciting and terrifying at the same time. With so many people involved in the process, Buyers are often left wondering who they can and should trust. Many times, there are important decisions early on that may get overlooked and decided on behalf of the Buyer without the Buyer’s knowledge. Here are ten considerations that should be addressed:
1. Broker Selection: “Are Realtors Required?”
One of the most frequently asked questions by a first time Buyer is, “Do I need to have a Realtor in order to buy a home?” In the State of Florida, it is not a requirement that a Realtor be selected in your purchase of a home. Instead, having a Realtor is an option for the Buyer and Seller. It is suggested to use the services of a Realtor in order to assist in finding a property and a potential Seller. An experienced Realtor will usually know certain areas and neighborhoods really well. They can advise you on good neighborhoods and property values. Realtors will usually utilize web searches such as Multiple Listing Services (MLS) and Zillow in order to search for properties that are on the market. While anyone can search systems, an experienced Realtor will sort through the listings and have a better gauge on over or under valued homes. Moreover, Realtors sometimes have private leads that are not advertised. Realtors can further assist with providing standard form contracts such as Purchase and Sale Agreements, Contract Addendums, etc.
When deciding whether to hire a Realtor for your transaction, keep in mind that Realtors receive a commission usually between 2-3%. For example, if the purchase price is $200,000.00, the commission will usually be somewhere between $4,000.00 to $6,000.00. For someone having a hard time finding the right property, this commission may be well worth the cost. However, in a situation when the Buyer has already found the Seller, the costs may not make sense for you.
2. Real Estate Title Agent/Attorney Selection: “When is an Attorney Required?”
Many states require a state licensed attorney to represent the Buyer at closing; Florida is not one of them. However, there are many instances wherein a Florida Licensed Attorney is necessary as illustrated in the examples below:
EXAMPLE 1: The Buyer and the Seller have a contract for Sale and Purchase Agreement. The Buyer finds that there is an existing addition to the home that was built without permits. The Buyer wants to back out of the deal or negotiate the purchase price due to this issue. The Buyer wants to know if she can cancel the contract and have her deposit returned.
In this instance, the Buyer is seeking a legal opinion on whether she can back out of the deal. Any other party to the transaction cannot and should not be answering these sorts of questions, as that would constitute the unauthorized practice of law.
EXAMPLE 2: Buyer and Seller enter into a contract for Sale and Purchase. The Seller is the Estate of a deceased owner. There has not been a final probate order entered in the matter. The parties are confused as to how to transfer title.
Closings are time sensitive. As such, having an attorney retained to resolve any legal issues promptly is always a good idea. There are times where a closing requires more complicated legal documents in order to cure title defects or convey marketable title. In these instances, an attorney would prepare documents necessary to convey title. In the above situation, the parties may need an Attorney to request an order to approve the sale of the property from a probate Judge. While the Buyer can obtain the approval pro se, it is suggested that more complex procedures as this one, be maneuvered by an attorney.
A useful tip to remember is that many times, the cost for a buyer to hire an attorney to conduct the title closing will be the same as hiring a title company. Hiring an attorney as a title agent will afford you the additional benefit of representation and legal advice throughout the purchase of your new home.
3. Purchase and Sale Agreement: “Is this just a standard form?”
The Purchase and Sale Agreement is usually the first contract the Buyer will encounter in a real estate transaction. It is most definitely not a standard form. It is the blue print for the entire transaction, and in my opinion the most important document that will be signed until the day of closing. Review this document in its entirety. Every single line is important and should be reviewed; click here to read about the most important paragraphs to look for.
4. Choosing the Lender “How can I get approved quickly?”
Choosing a lender is a very important part of the closing process. A good tip for selecting a lender is to be prepared with documentation that will be requested ahead of time. Most Lenders will request pay stubs, bank statements, W2 forms, statements of open current loans and line of credits, and names and addresses of current landlord. The faster the documents are provided, the faster the approval process will go. Another proactive step to take is to call local insurance agents and get estimates for insurance on the property. This way the Buyer can come up with estimations on what monthly costs will be when taking into account the mortgage payment with taxes and insurance.
Have the Lender provide the Goof Faith Estimate (GFE) as early as possible. The GFE will outline the closing costs and loan costs that the Buyer will have to pay at the closing. The GFE will also outline the terms of the loan, including prepayment penalties, fixed or adjustable interest rates, escrow information, etc. There should be no surprises when it comes to the terms of your Mortgage.
Lastly, if as a first time home owner, it becomes difficult to obtain Lender approval, try to apply for a Federal Housing Administration Loan (FHA), which usually requires a low down payment of about 3-3.5% of the purchase price.
5. Home Inspection
The terms of the Purchase and Sale Agreement will usually outline the terms for the inspection period. This period is usually 15 days. Upon executing the Agreement, call a professional home inspector and set up a time to inspect the property. The customary inspections include general inspection, termite, roof, air conditioning, defective drywall, mold, permits and structural codes, lead-based paint, radon, asbestos, zoning opinion letters, seawall, dock, and pool. Sometimes, the Realtor may know a local home inspector that they may be able to recommend. During, the inspection period, the Buyer may inspect any item of the home that makes the property not acceptable. This is true even in an “As Is” contract for sale. Some of these inspections are not standard, and if needed should be added on as term for inspection in an addendum to the contract. Just make sure to restore the property to its original condition and provide receipts to Seller for all inspections done.
Buyers must notify the seller, in writing of all repairs needed during the inspection period. Failure to notify, may take away the right to object to the non acceptable items. Sellers thereafter usually have 10 days to provide estimates for repairs. Many contracts have a repair limit. In such instances, the seller can agree to pay the extra amounts or the Buyer may agree to take the As Is condition after the limit is reached. If the property is not acceptable, and there is no remedies taken within the contract, then the Buyer has the right to cancel the contract in writing.
Many times the parties will have to draft up an agreement to deal with repair issues, if the parties still want to close on the property. These agreements may call for escrow repair funds to be held by the title escrow agent or a Seller credit to the Buyer, payable at the time of closing to fund repairs.
6. Lien Search
Prior to the closing, the Title Company or Attorney conducting the closing will perform a lien search on the property. The lien search reveals liens that have been placed on the property, including, real estate tax liens, tangible tax liens, code violations, open or expired permits, municipal/city liens, solid waste liens, city lien letters, unsafe structure, Association and Condominium liens and estoppels, and county special assessments. From these, the longest to obtain is usually the estoppels. The estoppels will show what assessments and maintenance fees are due to the association or condominium if applicable. Typically the Purchase and Sale Agreement will set forth a pro ration clause, where the Buyer is liable for the payments from date of closing through the next installment payment. As a Buyer, you may ask the title company or attorney representing you to inspect the lien search.
7. Title Search
A title search is conducted to ensure that the property is being given to the Buyer free and clear and with marketable title. A title search will reveal any open mortgages, judgments, and chain of title issues that pull up on the property legal description and address. These are conditions to close that must be resolved in order to issue the Buyer a title policy for the amount of the purchase price. The closing agent must resolve these issues by paying off open mortgages, releasing liens, and securing and correcting deeds and conveyances as needed.
Buyers should always request a Survey. A Survey details the property boundaries and how it relates to the title of the property. It ensures that the legal description matches the physical property and that there are no encroachments easements. Buyers should ask the Title Agent to provide the surveyor’s notes and the survey ahead of closing. Surveys may reveal extremely important issues that affect the ownership of a property. Here’s an example:
Buyer is asked to purchase a Survey as a part of the closing. The Buyer decides to waive the survey, in hopes of saving money at the closing. Years later, FPL shows up with a right to use their ease way, which runs 40 feet into the property.
This is certainly a situation that a Survey would have protected the Buyer. Although most Lenders require a survey, even when they do not, it is highly recommended. Surveys can also include flood and elevation certificates which may allow the Buyer to avoid purchasing flood insurance.
Homeowners insurance is purchased or substantiated, if the property being purchased includes homeowners insurance as part of association fees. Lenders require homeowners insurance coverage. The insurance protects the Lender in the event of a catastrophe. Since the property is the collateral for the Mortgage/Lender, in the case of a hurricane, flood, fire, or other natural disaster, the coverage insures the Lender will have protection. Lenders will not fund the transaction until they have received proof of full insurance. Homeowner’s insurance is typically paid upfront at or before the closing. The actual cost of homeowner’s insurance will depend on underwriting requirements, particular area where the property is located, and property value.
10. What to Expect at Closing
If the closing is being financed, Lenders will provide the Buyer with the option of receiving electronic disclosures or opting out of electronic disclosures. If the Buyer has opted out, then five days prior to closing, the buyer will receive a closing package from the Lender. If you have opted in for electronic delivery then you may expect the package within 3 days prior to the closing. At this time, the Buyer should call the Closing Agent and/or Attorney and go over the package in detail. It is always better to ask questions prior to the closing date to clear up any confusion.
The Closing may take place either in person or via mail. Always tell the Closing Agent and/or Attorney if this will take place via mail early on so that the documents can be provided timely. There will need to be a notary present in order to execute the documents. Some packages will require two witnesses. If you are closing at the Agent’s office, this service is typically provided by the Title Agent. The Buyer needs to bring in photo identification and, if applicable, the original approval letter from the Association/Condominium. Also, the Buyer must bring in either bank wire or cashier’s check the cash to close. Once the package is signed and sent to the opposing party and/or Lender, the Lender will fund the mortgage.
The most important thing to remember is to take the closing procedure with a positive attitude. There will sometimes be glitches and there will sometimes be items that need to be dealt with prior, during, and after the closing. The last step in a closing is receiving your Owner’s Policy and the Original Deed for your records and safekeeping.
A good relationship with the Seller, Title Company, and Loan officer goes a long way. A first time closing should be a celebration and a major milestone in a person’s life. However, it is also an important transaction with a lot of steps and security that must be accomplished. It is always advisable to have an attorney represent you in the purchase of your home.