Once the negotiations are complete and the contract has been ratified, there are many steps to get to closing, starting with the home inspection and completing the application for your loan if you are getting a mortgage. If you are paying with cash, then acquiring a mortgage will not apply to your transaction.
A home inspection is an objective visual examination of the physical structure and systems of a home, from the roof to the foundation. Having a home inspected is like giving it a physical check-up. If problems or symptoms are found, the inspector may recommend further evaluation by specialists such as an electrician, plumber, HVAC contractor, structural engineer, or roofer.
A home inspector is typically contacted right after the contract has been ratified, and is usually available within a few days. Before you sign, you do need to be sure that there is an inspection clause in the contract, making your purchase obligation contingent upon the findings of a professional home inspection. This clause should specify the terms to which both the buyer and seller are obligated.
The purchase of a home is probably the largest single investment you will ever make. Youshould learn as much as you can about the condition of the property and the need for any major repairs before you buy, so that you can minimize unpleasant surprises and difficulties afterwards.
The standard home inspector’s report
This report will review the condition of the home’s heating system, central air conditioning system (temperature permitting), interior plumbing and electrical systems; the roof, attic, and visible insulation; walls, ceilings, floors, windows and doors; the foundation, basement, and visible structure.
Be present at the home inspection
Our best professional advice is that you are present for the home inspection. You will be able to observe the inspector, and ask questions directly, as you learn about the condition of the home, how its systems work, and how it’s maintained. You will also find the written report easier to understand when you’ve seen the property yourself.
No house is perfect
If the inspector identifies problems, it doesn’t necessarily mean you shouldn’t buy the house, but you will know in advance exactly what to expect. During our home inspection negotiations with the seller, we may ask the seller for credits or repairs if the inspection reveals major problems. If your budget is tight, or if you don’t wish to become involved in future repair work, inspection reports will be extremely important to you. Of course, a home inspection also points out the positive aspects of a home, as well as the maintenance that will be necessary to keep it in good shape. After the inspection, you will have a much clearer understanding of the property you are about to purchase.
Can I do a home inspection myself?
Even the most experienced homeowner lacks the knowledge and expertise of a professional home inspector who has inspected hundreds, perhaps thousands, of homes in his or her career. An inspector is familiar with the many elements of home construction, and their proper installation and maintenance. He or she understands how the home’s systems and components function together, as well as how and why they may fail. Above all, most buyers find it difficult to remain completely objective and unemotional about the home they really want, and this lack of objectivity may affect their judgment. To be sure you get the most accurate inspection information, it’s best to obtain an impartial third-party opinion by a qualified home inspection expert. If you do not know a home inspector, the Magnificent Manors Team will provide you with recommendations from our Referral Directory of highly qualified, trusted professional inspectors so you can select the one that is right for you.
The house is in good condition, newly renovated or new construction; do I really need an inspection?
Definitely. Now you can complete your home purchase in full confidence of your home’s condition. You will also have learned valuable things about your new home, including maintenance tips, from the inspector’s written report. You will want to keep that information for future reference.
Obtaining a mortgage
Just like you would shop for any expensive item you are purchasing, researching the loan options available to you and then comparing prices (interest rates and fees) is equally important. The Magnificent Manors Team recommends consulting your loan officer for more information. We can also recommend a loan officer if you need one.
Types of Loans
Loans can have a fixed interest rate or a variable interest rate. Fixed rate loans have the same principal and interest payments over the life of the loan. Variable rate loans can have any one of a number of “indexes” and “margins” which determine how and when the rate and payment amount change. If you apply for a variable rate loan, also known as an adjustable rate mortgage (“ARM”), a disclosure and booklet required by the Truth in Lending Act (TILA) will further describe the ARM.
Most loans can be repaid over a term of 30, 20 or 15 years depending on the term of the loan. You can also pre-pay your mortgage assuming there are no pre-payment penalties. Most loans have equal monthly payments. The amounts can change from time to time on an ARM, depending on changes in the interest rate. Our best professional advice is to shop for the home mortgage loan rates and terms that best suit your needs.
Interest Rate, “Points” and Other Fees
Often the price of a home mortgage loan is stated in terms of an interest rate, points, and other fees. A “point” is a fee that equals one percent of the loan amount. Points are usually paid to the lender, mortgage broker, or both, at settlement. Often, you can pay fewer points in exchange for a higher interest rate, or more points for a lower rate. Ask your lender or mortgage broker about points and other fees.
The loan officer is required to provide you with a three-page form called the Loan Estimate within three business days of applying for a mortgage. The Loan Estimate spells out the estimated interest rate, monthly payment, and total closing costs for the loan. This form also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future. It will also tell you if the loan has special features like prepayment penalties if you pay the loan off early or negative amortization which means your mortgage loan balance increases even if you make your payments on time.
When you receive a Loan Estimate, the lender has not yet approved or denied your loan application. The Loan Estimate shows you what loan terms the lender expects to offer if you decide to move forward. Since every lender is required to use the same Loan Estimate form, you will have the information you need to compare mortgage loans and the associated fees and terms on an apples-to- apples basis.
Conventional, fixed-rate mortgages
This mortgage option is a loan with a constant interest rate and equal payments over a set period of time-most commonly 30 years. You can also obtain 15- and 20-year mortgage loans. The advantage of fixed-rate loans is predictability and locking in a favorable interest rate for the life of the loan.
At some point, you may want to refinance your loan, or pay it off early to eliminate thousands of dollars in interest. If lower rates dictate that the time is right to refinance, it’s a good idea to compare savings on lower rates to the costs of incurring a new mortgage-such as loan origination costs, points, and other bank fees. Ask your loan officer for more information about fixed mortgages and terms.
Adjustable-rate mortgages (ARMs)
As the name implies, the interest rate on an adjustable-rate mortgage changes throughout the term to reflect current interest rates. ARMs are most popular when rates are relatively high and appear to be dropping, and when the difference between the ARM and the fixed-rate is greater than 2 to 3 percent. Different lenders offer variations in the front end of their ARM plans, such as points, or discounted initial rates.
To make a useful comparison of an ARM rate, consider the index upon which the rate is based, the margin or spread between that index and the rate paid, and the intervals at which the rate and payments are adjusted. Consult with your loan officer for more information.
Tip: Always look at the index plus the margin when comparing ARMs. The larger the margin, the less likely the rate will go down, even if the interest rates drop.
Federal government programs
Lenders offer Federal Housing Administration (FHA) insured mortgages on new or existing single-family homes for as little as 3.5% down. FHA mortgages can also be assumable. Sometimes a premium is required when the mortgage is assumed, then refunded when the note is paid off. Consult with your loan officer for more information.
Tip: When purchasing a condominium, ask your Realtor ® if the building is FHA approved. If the building is not FHA approved, an FHA loan is not an option for you. Ask your lender about other low down payment loan options that are available to you.
U.S. Department of Veterans Affairs (VA) guaranteed loans
If you are a veteran or a surviving spouse (provided you do not marry) you may be eligible for a VA loan. The U.S. Department of Veterans Affairs (VA) guarantees these mortgage loans in the event a property is foreclosed due to default. These assumable loans are issued by qualified lenders and may be used to buy, refinance, construct or repair a house. Consult with your loan officer for more details.
“Locking in” your rate or points at the time of application or during the processing of your loan will keep the rate and/or points from changing until settlement or closing. Ask your lender if there is a fee to lock-in the rate, and whether the fee reduces the amount you have to pay for points. Find out how long the lock-in is good, what happens if it expires, and whether the lock-in fee is refundable if your application is not approved.
Tax and Insurance Payments
Your monthly mortgage payment will be used to repay the money you borrowed, plus interest. Part of your monthly payment may be deposited into an “escrow account” so your lender or servicer can pay your real estate taxes, property insurance, mortgage insurance and/or flood insurance. Ask your lender or mortgage broker if you will be required to set up an escrow account for taxes and insurance payments.
Transfer of Your Loan
While you may start the loan process with a lender or mortgage broker, you could find that after settlement another company is collecting the payments on your loan. Collecting loan payments is often known as “servicing” the loan. Your lender or broker will disclose whether it expects to service your loan or to transfer the servicing to another bank. If your loan is transferred, make sure you confirm that the new bank servicing your loan is legitimate. There are opportunities for fraud during this process.
Private mortgage insurance and government mortgage insurance protect the lender against default, and enable the lender to make a loan that the lender considers a higher risk. Lenders often require mortgage insurance for loans where the down payment is less than 20% of the sales price. Ask your lender if mortgage insurance is required, and, if so, how much it will cost. Mortgage insurance should not be confused with mortgage life, credit life, or disability insurance, which are designed to pay off a mortgage in the event of the borrower’s death or disability.
You may also be offered “lender paid” mortgage insurance (“LPMI”). Under LPMI plans, the lender purchases the mortgage insurance and pays the premiums to the insurer. The lender may increase your interest rate to pay for the premiums — but LPMI may reduce your settlement costs. You cannot cancel LPMI or government mortgage insurance during the life of your loan. However, it may be possible to cancel private mortgage insurance at some point, such as when your loan balance is reduced to a certain amount. Before you commit to paying for mortgage insurance, ask your lender about the specific requirements for cancellation.
Flood Hazard Areas
Most lenders will not lend you money to buy a home in a flood hazard area unless you pay for flood insurance. Some government loan programs will not allow you to purchase a home that is located in a flood hazard area. Your lender may charge you a fee to check for flood hazards. You should be notified if flood insurance is required. If a change in flood insurance maps brings your home within a flood hazard area after your loan is made, your lender or servicer may require you to buy flood insurance at that time.