Purchasing your first house can be a little overwhelming and stressful, but knowing what to expect along the way can help ease some of your anxiety. It is also important to know what you are doing because for a large majority of Americans, your home is the greatest investment that you will make in your lifetime.
Talk with your loan officer and figure out how much you can afford. If you do not have enough cash on hand to purchase a home outright, you will likely seek financing from a bank. Most traditional loans have a fifteen or thirty year term and each have their own advantages. For example, with a fifteen year term loan, you will end up paying less interest in the long run, but your monthly payment will be higher. Conversely, a thirty year term loan carries a lower monthly payment, but you will end up paying more interest over time. Most banks will also require that your monthly loan payment include escrows for your real estate taxes and homeowner’s insurance. That means your monthly payment will include additional money that your bank will use to pay your real estate taxes and homeowner’s insurance.
Each bank has different lending requirements and policies, but traditionally a typical down payment on a house is 20% of the purchase price. Twenty percent can seem like a lot, especially for a young professional who just finished school or started a new job. Some banks will lend you money if your down payment is less than twenty percent, but you may end up paying a slightly higher interest rate or you may pay what is called “PMI” or private mortgage insurance. PMI is an additional fee that you pay and is included in your monthly payment that essentially insures your loan and protects the bank if you default.
After you know what you can afford, now you can start looking. You can enlist the services of a real estate agent who will help you identify houses that include the features that are important to you. Although your agent’s commission is negotiable, they are usually paid a percentage of the sales price and that commission is usually paid by the seller. You do not have to use an agent if you do not want to.
When you find the house you like, you will want to review the residential disclosure form that is completed by the seller. This is a form that the seller completes that identifies any problems with the house that the seller is aware of. Understand though, the residential disclosure form is not an exhaustive list of what can or might be wrong with the house. Additionally, the seller is not legally responsible to point out every defect in the house to you. Walk through the house, look in the basement and/or attic, and ask questions about the heating and cooling systems or anything else that looks important.
If you like the house, make an offer to purchase from the sellers. You and/or your agent will likely engage in some negotiations with the sellers. You might negotiate about the price or require that certain work to the house to be performed before you close. Once you work out all of the terms of your agreement, you or your agent will reduce it to writing in a purchase agreement and will be signed by both parties. Most purchase agreements require that you deposit a sum of money (typically $500 to $1,000) with the seller or the seller’s agent to show that you are serious about purchasing the house. The purchase agreement is a legally binding agreement and if you back away from the deal, the seller typically keeps your deposit as damages. If the seller tries to back away from the deal, you can file a lawsuit to force the sellers to sell the property. These are typical provisions to a purchase agreement, but may not necessarily be in your agreement.
Your purchase agreement may also include a provision to have a home inspection done. You can hire a home inspector who will essentially come and inspect the house and give you a report on his findings. The inspector may identify serious or minor problems that the sellers were unaware of. Your purchase agreement should include a provision that if a home inspection is done and a serious problem is identified, that the seller either fixes it or allows you to cancel the contract and get your money back. Remember though, no house is perfect and minor problems can be expected.
If you still decide to go forward with the purchase, a title company will prepare all of the necessary paperwork to complete the transfer of the house. The title company will also calculate the total amount of money that you must “bring to the table” to complete the purchase. There are various “closing costs” associated with real estate purchases that both sellers and buyers pay. You will get an itemization of those costs on a form called the settlement statement at closing. At the day of closing, the title company will collect your money and also have you execute all of the documents necessary for your loan, which can sometimes exceed 150 pages.
After you have signed all of your paperwork, the title company will record the deed that transfers the property to you. After the deed is recorded at the county recorder’s office, the house will officially become yours. Your purchase agreement should also include a provision of when you actually get possession of the house. Most buyers want possession immediately after the deed records and sometimes sellers need up to thirty days after recording to vacate the house. After you take possession, you will want to coordinate with the various utility companies for services.
Congratulations on your first home purchase and welcome to being a homeowner.
Joshua R. Hiznay is an attorney licensed in Ohio and can be contacted through his website www.hiznaylaw.com. The foregoing is informational in nature only and not intended to be legal advice and does not create an attorney-client relationship with Joshua R. Hiznay. Each situation is different and some or all of the information presented may not apply to you. You should always consult with your own attorney before making any legal decisions.