M is for Money

This is Part 8 of The First Time Home Buyer: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7

You’re both nervous and excited - the sellers accepted your offer. Now there are many things you need to do before you can complete the purchase of your new home. This is the time to gather as much information as you can regarding the house and its condition. You also need to secure financing and find insurance. This is when you decide whether to continue with the purchase, or to back out.

What is Escrow?

First, real estate transactions are handled differently depending on where you live. Some areas use an escrow process where a third party acts as a liaison between the seller and buyer. Both parties pay for the services of an escrow company, who prepares the necessary documents and handles the financial side of the transaction. In other parts of the country, lawyers are used to handle these details. For convenience I’m using the term escrow to refer to the period of time between your offer being accepted and closing on the deal.

Property Inspection

Every buyer needs to have the house professionally inspected before closing. This inspection should take place as quickly as possible – and hopefully you included an inspection contingency in your offer. Inspectors are trained to look over the house and note any problems or defects. Some will be minor details that won’t affect your decision to buy, but others may make you reconsider. The inspector should go under the house, up on the roof and check the systems (plumbing, electrical etc). It’s best to be present as the inspector does their work so you can ask any questions and get personal feedback. They will also produce a report for you to keep.

Inspectors should have a good general knowledge of houses, but they aren’t experts in all areas. Often they will recommend you hire additional specialists to do a more thorough evaluation of certain systems or areas of concern. Whether to perform these additional inspections is up to you, the cost for the inspector and any additional experts will be coming out of your own pocket. This has to be weighed against the cost of discovering an expensive problem after you’ve bought the house. Also, inspectors have very little liability if they overlook a problem. Generally their liability is limited to the cost of the inspection, which is certain to be less than the cost of repairs.

Financing

Unless you are paying cash you are going to need a loan to buy that house. An earlier post covered Mortgage Basics – as soon as your offer is accepted you need to apply for a loan. The application and approval process takes time so it’s important to start early. The lender is going to require a lot of paperwork, so gather as much as possible before applying. Tax records, pay stubs, financial records and the purchase offer to start. They will also require an appraisal, insurance and often a termite inspection before the loan can be finalized. Typically the seller will be responsible for the termite inspection and repairs.

Appraisal

An appraisal is a necessary part of the loan approval process, but don’t get one before you’ve applied for the loan. Some lenders require that you use a specific appraiser and will not accept one from anyone else. You will have to cover the cost of the appraisal as well, either out of pocket or it will be added to the closing costs. Hopefully you’ve included an appraisal contingency in your offer to protect yourself in the event the house appraises too low.

Insurance

You will need to secure homeowner’s insurance before the lender will fund the loan. Just as with car insurance you should shop around and compare rates. At a minimum you will need a basic homeowner’s policy, which typically covers damage by fire and a few other causes. Homeowner’s policies are rather limited - if it’s not listed, it’s not covered. Flood and earthquake policies are purchased separately.

Title Insurance and Disclosures

Title insurance is a one-time policy that only pays if someone else later appears with a claim to the title (ownership) of the house. You have to get a policy to protect your lender, it’s optional to get a policy that pays you as well. There are two categories of disclosures, one from the seller that lists any known defects and one prepared by a professional based on public data. The disclosures I received informed me I live in an earthquake zone (wow in California, can you imagine). Often the escrow company, the lender, or your lawyer will have a title company they use.

Negotiations

Now is the time for any final negotiations with the seller. The contingencies that you placed in your purchase offer give you the ability to bargain if the inspection turns up issues or the house appraisal is low. Often buyers will demand that a seller fix the problem areas identified by the inspector. You could also negotiate for a credit or price reduction if the seller doesn’t want to deal with repairs. As a last resort you can walk-away, and only be out the price of an inspection.

Gut Check Time

Now that you’ve gotten to know the house, warts and all, do you still want to own it? Backing out at this point means losing a few hundred dollars for any inspections and appraisals - hopefully you’ve protected your deposit and left yourself an escape route. Compare this to thousands in repairs once the house becomes your problem. Better to make that decision now rather than after you’ve acquired one very expensive headache.

Part 9 - Closing Time

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