Buying a Home
Buying a home is a big step in everyone’s life, and for many people, obtaining a mortgage loan in order to buy a home is the most significant debt that they will ever take on. The purchase of a home is not a simple process, but involves a series of complex steps that trigger the application of a variety of different state and federal laws and regulations. Additionally, the sale of a home affects the legal obligations and rights of both buyer and seller in a number of ways. Therefore, it is essential that all prospective homeowners be aware of their legal rights, responsibilities, and obligations prior to becoming homeowners.
Qualifying for a Mortgage Loan
As the typical home buyer does not have the cash to purchase their home outright, a buyer must qualify for a mortgage loan. A buyer must apply for a mortgage loan through a bank or other lending institution. The Equal Credit Opportunity Act safeguards your right to obtain credit, and protects you against being denied credit as a result of your sex, age, race, religion, and/or national origin. However, depending on the amount of the loan requested, the buyer’s debt-to-income ratio, income, assets, and credit scores, the lender may approve or deny your mortgage loan application. These factors also affect the terms of the mortgage loan offered, in terms of interest rates, the length of the loan term, and whether the lender will require the purchase of private mortgage insurance at an additional cost to the buyers.
As an applicant for a mortgage loan, you also have certain legal rights under a federal law known as the Real Estate Settlement Procedures Act (“RESPA”). When you apply for a mortgage loan, the lender must give you certain information, including a Good Faith Estimate as to the amount of settlement charges you will face if your loan is approved, and a Mortgage Servicing Disclosure Statement, which addresses the transfer of your loan to another financial institution, as well as the procedures for making a complaint. You must receive this information at the time of your loan application, or receive it in the mail within three business days of your application. If the lender denies your loan application within three days, however, the lender need not comply with these aspects of RESPA.
Once you have decided to make a written offer on a home, it is wise to hire a certified home inspector in order to examine the home for any major defects. For instance, a home inspector will check major systems in the home, including electrical, heating and cooling, and plumbing, as well as structural issues in the roof, floors, walls, etc. If you choose not to hire an inspector, you will essentially be purchasing the home “as-is”, and any problems or defects with the home that you discover after the real estate transaction is final will become your responsibility. Therefore, the advantage of hiring a home inspector is that you will have the opportunity to address any defects prior to purchasing the home, whether it be through a decrease in purchase price to account for necessary repairs, or by choosing not to purchase the home altogether. In many cases, a purchase contract is written with a specific clause that allows you to withdraw from the contract if a major defect is discovered, and you are unable to resolve the issue with the seller to your satisfaction.
Obligations of the Seller to Disclose Defects
In any real estate transaction, the seller is usually required to fill out certain disclosure forms in order to make the buyer aware of major defects. The details of these requirements vary widely from state to state. Even in states that do not require the seller to complete disclosure forms, the seller is still required to disclose certain major or material defects in the home. Furthermore, even if your state does not require a seller to disclose such a defect to the buyer, failing to do so may result in future litigation with the buyer who later discovers the defect; such future legal problems potentially can be avoided by simply disclosing and dealing with the defect in the first place.
Title Insurance and Taking Title to Your Home
It is standard procedure to obtain title insurance when purchasing a home. A title insurance company will examine the historical title and ownership of the property, and attempt to identify any problems that could adversely affect you taking title of the property. Plus, title insurance protects you in the event that another claim of ownership is made to the property, and/or if you have to defend your title to the property in court.
Another decision to make is how title to the property will be held by the buyer(s). In the case of a single person buying a home, the deed transferring title is relatively straightforward, in that the title is placed only in that person’s name. When there are two or more buyers, however, there are different options for taking title to real estate. For instance, buyers can take title to a property as joint tenants with right of survivorship. In this case, if one owner dies, then the other owner(s) automatically receive his or her share of the property. In contrast, buyers can take title as tenants in common, which has no right of survivorship. Therefore, if one owner dies, his ownership share passes to his heirs according to his will, or, if there is no will, to his surviving family based on the laws of intestacy. Furthermore, for married couples, the typical method of taking title is as tenants by the entireties, whereby upon the death of one spouse, the other spouse automatically becomes the sole owner of the property.
Escrow Accounts and the Closing Process
In order to finalize the purchase of a home, the buyers and sellers must participate in a closing, at which all legal and required documents are signed, and title of the property is formally transferred from the sellers to the buyers. At this point in the transaction, the Real Estate Settlement Procedures Act (“RESPA”) sets forth certain requirements. RESPA requires that your lending institution provide you with a completed HUD-1 Settlement Statement at least one day before closing. This document sets forth all of the charges that both you and the sellers will be responsible for at the time of closing. RESPA also requires that your lender provide you with an Affiliated Business Arrangement Disclosure prior to settlement, if there is any business relationship between the providers involved during your closing process.
Furthermore, in addition to the HUD-1 Settlement Statement, RESPA also requires that a lender furnish you with an Initial Escrow Statement at settlement or within 45 days after settlement. An Initial Escrow Statement sets forth the estimated property taxes and insurance premiums that you will pay during the first year of your mortgage loan. This document also will detail the total amount of escrow payments you will make under your mortgage loan, as well as any required minimum amount that the lender requires to remain in your escrow account at all times.
Responsibilities of Homeownership
Following settlement of your mortgage loan, the Real Estate Settlement Procedures Act (“RESPA”) also requires lenders to send you an Annual Escrow Statement, which contains an itemized listing of all payments and deposits made on your escrow account over the last year. If your escrow account is overpaid or underpaid due to changes in your insurance premiums and/or property taxes, your lender must refund overpayments or bill you for underpayments, as well as adjust your monthly mortgage payment as necessary. So long as you maintain your original mortgage loan, you also are entitled to a Servicing Transfer Statement whenever your lender sells or transfers the servicing of your loan to another company or lender.
If you took out a mortgage loan in order to purchase your home, your financing agreement with your lender will require you to maintain homeowner’s insurance on your home at all times. In many cases, your insurance payment will be a part of your mortgage payment, as it is paid by your lender through your escrow account. Letting your homeowner’s insurance policy lapse may constitute a default on your financing agreement, which may cause you to ultimately lose your home.
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