You’re thinking of purchasing a home, but you’re not sure of the steps to take. Here are some tips that may be useful to you.
THE MORTGAGE
First, find out your qualifications for financing and the costs associated with both, purchasing the home, and obtaining financing. Determine your monthly costs, such as loan payments, real estate taxes, insurance, utilities and the most silent of expenses, upkeep of the home.
Let’s begin with financing: the mortgage. Start with down payment and expenses. How much money do you have overall for purchasing the house. Some of it will go towards down payment and some towards expenses. Next, understand DTI and how important this is to lenders, and how much more important it should be to you. DTI stands for debt- to- income ratio. It is a calculation that a lender uses to qualify you and it’s the relationship between your total monthly debt charges to your gross income.
Armed with this knowledge, go to a lender and find out what is the maximum monthly payment that you qualify for. Keep in mind that lenders may use a DTI as high as 50%. But, you should calculate what is the most DTI that you are willing to pay and make a decision accordingly. Your DTI may be higher than a lender’s, in which case you will have no choice but to accept a lender’s DTI. But, your DTI may be lower than a lender’s. Only you can make that decision.
You must also understand the mortgage. Is it a fixed rate or a variable (the rate and/or payment may change in the future and at subsequent dates in the future)? Is there PMI (private mortgage insurance) or MIP (mortgage insurance premium for FHA guaranteed loans)? If PMI or MIP, how will it work for you, and how much and for how long will it increase your monthly payment?
What about property taxes? It is possible that the present owner of the property enjoys a tax abatement or exemption of which you may not avail yourself.
As for house insurance, price it out. Your premiums may be very low or very high depending on the size of the house, the construction of the house, its proximity to certain areas, such as water, which may require you to purchase flood insurance, and credit rating.
OFFER AND ACCEPTANCE
Once you have determined that you can make an offer for a certain price and be able to afford the purchase, it’s time to look at houses and, once you find one that is to your liking, it’s time to make an offer. You should always be precise in your offer and have clear terms of your down payment, your mortgage amount, the items that you want included in the price of the house and the ones you don’t want included, such as “the old carpet.” It’s possible that the seller will not accept your initial offer or will decline to remove the carpet, for example, but negotiate it and see what you can get. If you don’t know anything about construction, you should consider having the house inspected by someone that does or by an engineer. If that is the case, make sure your offer is subject to an inspection.
THE HOUSE INSPECTION
Check the house. Make sure it is functional. Make sure that you get an estimate of how much money you may have to invest in repairing it in the near and distant future.
LAWYER SELECTION
This may sound self-serving, but the lawyer may be your last line of defense between financial stability and ruin, between marriage bliss and divorce, between health and heart attack, between youth and fast aging, between happiness and sorrow… I guess you get the point. Making the wrong decision in purchasing an expensive item, such as a house, can be devastating. An experienced lawyer can guide you in the right direction. A properly selected lawyer is the only party that you will meet in a transaction who should be able to look at the whole picture of what you are about to do and advice you accordingly. The realtor wants to sell you a house. His/her function is to show you the house and serve as a mediator between you and the seller. The mortgage officer deals only with the mortgage. The engineer checks the house. But, the lawyer can analyze the transaction, the mortgage payments, the engineer’s inspection and question any item in the whole process which may not have been questioned by any of the other parties.
Also important are legal terms in a contract, as well as different laws that apply to real estate, taxation and financing. Make sure that the lawyer you select has not only knowledge but experience in real estate matters. A lot of lawyers practice different areas of the law and seldom get involved in real estate matters, but they will represent you if the opportunity presents itself.
Ask relatives, friends, co-workers for recommendations. Do some research on the internet. Maybe contact local bar associations. Ask lawyers you’re seeking to hire questions about the subject matter, such as title insurance, mortgage terms, building violations, house inspections, good faith estimates (read our post Mortgage Financing). What bar association real estate committees does he/she participate in? Educate yourself as much as possible before you make your selection.
Keep in mind that you’re paying for a professional service. You’re not buying a can of soda which, at whatever price, is still the same can of soda.
ESTIMATED EXPENSES
If you are obtaining financing, the lender must give you a closing estimate, an estimate of expenses (read our post Mortgage Financing). In general, the following is a list of expenses:
1. Bank fees: appraisal, credit report, origination fee, charge for the interest rate selected, tax service fee, bank attorney (or settlement agent) fee, flood certification and miscellaneous others;
2. Deposits with the lender to pay real estate taxes and insurance in the future, PMI or MIP (if applicable);
3. Insurance premiums for the first year;
4. Title insurance for yourself, but also your lender, searches for violations, taxes, etc. Title insurance companies are regulated by the New York State Department of Financial Services. They must submit a chart of proposed premiums to the Department for approval. Some of the most active title underwriters in New York are members of the Title Insurance Rate Service Association (TIRSA). TIRSA submits the chart for approval. The premiums are all the same for all TIRSA members and their agents, or abstract companies. You can calculate these premiums by visiting http://www.tirsa.org. You may also visit Fidelity National Title’s site at http://nyrates.fntic.com. In addition, title underwriters and their agents charge fees for searches they conduct with governmental agencies that have jurisdiction over the property. The total for all these should not exceed $600.00. If more, you should question why. Make sure that the answer your attorney gives you makes sense;
5. Survey: this is a diagram of the lot dimensions and the dimensions of the structures on the lot. The cost of a new survey depends on the dimensions of the property, the configuration of the lot and its location. It may range between $500.00 and $1,500.00;
6. Mortgage tax: in New York City: 2.05% of the amount of the mortgage up to $500,000.00; 2.175% of the amount of the mortgage for mortgages $500,000.00 and more, so long as the property is a one-to-three family dwelling. Otherwise 2.8% of the mortgage amount. Keep in mind that the mortgage tax is calculated based on the tax classification, and not the legal occupancy, of the property. In other counties mortgage taxes are different. You may call our office for free calculation information;
7. Recording fees;
8. Your attorney’s fees;
9. Adjustment for taxes paid by the seller in advance;
10. “Mansion tax, ” applicable to sales of $1,000,000.00 or more if the property is a one-to-three family dwelling.
If you are obtaining financing that requires private mortgage insurance or FHA mortgage insurance, you should look at these additional upfront costs and monthly premium fees paid to the lender.
THE PROCESS
Once you know your qualifications for financing, have retained an attorney and have found a house of your liking, it’s time to make an offer. Once your offer is accepted by the owner, the owner’s attorney will send a proposed contract to your attorney for review, possible changes and signature. If all is well, you will sign a contract and issue a check for the contract deposit. This check is generally payable to the seller’s attorney and it gets deposited into an attorney trust account. No one can touch that money until closing, when the seller becomes entitled to it, or until it is released to either party pursuant to the terms of the contract.
TERMS IN A CONTRACT OF SALE
1. Address of the property.
2. Price .
3. Contract deposit and who is it paid to. It should be paid in trust to the attorney for the seller. The deposit should not be released to the seller except at closing.
4. The mortgage contingency: the contract should be subject to you obtaining a mortgage in the amount you plan to apply for and, if denied through no fault of yours, the contract deposit should generally be refunded to you.
5. Title clearance contingency: title to the property should be delivered to you free and clear of any liens, judgments, outstanding property taxes or many other possible “clouds” on title.
6. Contingency for violations: local governmental authorities that have jurisdiction over the property may issue violations for non-compliance of codes and ordinances. The responsibility for removing them generally falls on the seller.
7. There should be a representation regarding the legal use of the property, for example two family dwelling and garage.
8. The contract should include the representations the seller is making regarding the condition of the house. The customary representations are that the plumbing, electrical and heating systems, as well as the appliances included in the sale, will be in working order and that the roof will be free of leaks at closing.
9. The contract should spell out who’s responsible to pay transfer taxes. Generally the seller is responsible to pay transfer taxes. There is a transfer tax at the State level and localities may also have transfer taxes, as for example, New York City and Yonkers. There is also a transfer tax imposed on the purchaser, commonly known as the “Mansion Tax” when the property is a 1-3 family dwelling (coop or condo included) and the price is $1 million or more. Keep in mind that parties can negotiate who will pay the transfer taxes.
10. It is customary that a contract be subject to conducting a termite inspection. If you hired an engineer, it is possible that the engineer conducted the inspection. If not, you get a second chance.
11. Federal law provides that you have the right to conduct a lead paint inspection. You have a 10-day period after the contract is signed to conduct this inspection, but you can waive this right.
12. State law requires that a seller provide you with answers to a questionnaire formulated by the State containing questions pertaining mostly to the condition of the house. The seller has the option of not answering this questionnaire, but must then give you a credit at closing of $500.00. The contract should contain this provision.
13. The contract should spell out the damages that either party will face if that party defaults in performing the terms of the contract.
14. The contract should provide the names of the realtors involved in the transaction and who’s responsible to pay them.
15. The closing date is an important term. The desired language should read “on or about….” This gives flexibility to both sides in scheduling the closing. You should not accept a date certain or a “time is of the essence” date unless you understand completely the negative consequences of such term.
16. Possession of the house after closing is to be negotiated and included in the contract. Is the seller delivering the house vacant to you at closing or is he/she staying in possession after closing? Are there tenants that have the right to stay in the house because they have a lease or have tenancy protection under the law, such as rent stabilization or rent control? If not, do you want the tenants out of the house at closing? These points must be negotiated as part of your offer and dealt with in the contract.
The above are customary terms in a contract. There may be special provisions that apply to a specific transaction. For example: the seller has agreed to perform certain repair work in the house prior to closing. The sale may be a “short sale” and thus subject to the approval by the seller’s lender of the sale of the house to you.
THE CLOSING
Once you are ready, the seller has cleared title objections, and your lender has cleared the file for closing, the transaction can be scheduled for closing. At the closing you pay the seller the purchase price, and the seller gives you a deed to the property. The title company is responsible for recording that deed with the local recording office. You become the owner of the property and obtain the keys to the house either at closing or, if the seller is staying in possession of the house as negotiated, at the time the seller moves out.
Purchasing a home is an important step in a person’s or family’s life. Make sure that you give it thoughtful consideration and that you elect the right persons to guide you through the process. At the right price, at the right monthly cost, real estate is probably the best investment that you can make in your life.
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