It’s the American Dream, right? To own your own home, to put down roots and be responsible for your own little corner of the world. This is the case for most people, but if the 2008 financial crisis has taught us anything about home ownership, it’s that owning a home is not for everyone. Here are a few other facts about home ownership proven during this period:
- Home values do not always go up.
- If a lender says you don’t have to document your income, RUN!
- Not everyone can, or should, own a home.
- Your monthly payment isn’t the only cost of owning a home.
Despite this period, or maybe because of it, millions of people are confused about how to navigate the complex world of home ownership.
These people have real questions:
How much house do I need?
How can I really afford a house?
What are my ongoing costs?
Should I use a realtor?
What is an escrow?
What should I look for during an inspection?
In this home buying guide, we take you through the seven basic steps of buying a home and attempt to answer many common questions nervous homebuyers ask every single day.
Step 1: Should You Even Buy?
So all your friends are buying a house, and your mom says it’s a good investment. What else do you need to consider before making the leap? Before getting into the pros and cons of home ownership, generally speaking, there are a few universal factors to consider before committing to purchasing a home.
- Time frame. Buying a home usually isn’t a good idea if you’re likely to change jobs or want to move within the next 7-10 years.
- Down payment. You usually need to come up with roughly 20% of the purchase price in cash before financing.
- Costs above and beyond your mortgage. Most people don’t factor in additional costs like property taxes, maintenance, and upkeep and repairs. These expenses are all additional costs a renter doesn’t have to think about, and they can be significant.
Pros and Cons: Buy vs. Rent
The advantages or disadvantages to buying a home greatly depend on your goals and values. This list is not exhaustive, but it captures some of the very important differences between buying and renting. Again, your age, lifestyle, goals, and priorities will make certain factors on this list more important than others.
Building Equity in Your Asset
Part of your monthly payment when you own a home goes to paying the bank interest, and part of it goes to paying down the balance on your loan. When this happens, the amount of your home goes up. Over time, your equity value (your home’s value minus the mortgage balance left) increases.
If home prices stay stable, this process acts like a savings account. If you bought a $300,000 home, you’ll likely pay $60,000 in cash at the time of closing. If you sell your home after 30 years of payments, you would have $300,000 in cash (minus any fees)! Historically, homes have risen in value over time, so your equity value could be even more.
If you choose a fixed rate mortgage (explained later), the amount you pay to the bank will never increase. Rent, on the other hand, is subject to increases over time at the discretion of your landlord. These increases are usually dependent on inflation and rental demand in your area.
Homeowners can deduct their mortgage interest payments and property taxes at tax time. Depending on your income and tax rate, if you pay $15,000 to the bank in interest and $5,000 in property taxes, for instance, you could reduce your taxable income by $20,000! If you’re in the 25% tax bracket, this could net you $5,000 in savings.
Furthermore, take that $5,000 in savings and divide by 12. This equates to about a $417-per-month savings. So, if you were deciding between two identical homes, one you could rent for $2,000 per month and the other you could buy with a monthly mortgage payment of $2,000, you might want to buy the home because doing so would save you $417 per month. Of course, still take into consideration other factors like down payment and maintenance.
You Could Rent Out Your Home
If you buy a home, you can choose to rent it out and generate income. This works best in an area where rents are higher than your mortgage payment. You should try to make enough over and above your expenses because you still have to pay for maintenance issues that come up.
If you own your own home, you can change it to suit your preferences and tastes. Laws and homeowners’ association rules do place some limitations on what you can do, especially to the exterior. However, interior remodels, paint, wallpaper, or anything else can be altered to your liking.
Selling a house is very different from selling stocks or bonds. If you ever need to sell for any reason, you may not be able to sell your home as quickly as you’d like or for as much money as you need.
If It Breaks, You Fix It
As a homeowner, you are responsible for all expenses and repairs to your home (unless it’s covered by insurance). This means the true cost of your home is much more than your monthly payment. Your refrigerator breaks in the middle of the night? $700. Water heater goes? $2,000. Need new windows? $7,000 and up. Get the picture? You need to budget for these items in the future and come up with a plan to pay for them.
In addition to your principal and interest payments, you’re also responsible for paying property taxes. Property taxes can and will increase over time. This could make your home less affordable. Make sure to always take property taxes into account when comparing monthly costs of buying vs. renting.
Your Home Could Lose Value
Before 2008, the assumption was that home values always go up. However, as anyone who bought a home in 2006-2007 has learned the hard way, there’s no guarantee your home will increase in value over time.
The Down Payment
The tough pill to swallow for prospective homebuyers is coming up with the cash to satisfy a 20% down payment. If you save up and use the money for a down payment, that cash won’t be available for other uses, including emergency funds. There are some ways to put as little as 3% down, but these options are usually more expensive.
You Don’t Pay for Maintenance
Normal wear and tear on the unit or house you rent is the responsibility of the owner. If the toilet breaks, you don’t get the bill. If your roof leaks, the owner pays.
You Can Be Much More Mobile
If you don’t envision living in the same city or area for at least the next five years or more and then rent. This is especially true if you’re not settled into your career. Unloading your house is much more difficult and costly than getting a subletter.
Furthermore, our interconnectedness allows many people to work from anywhere. Many people choose to travel or move around to experience different cultures or countries. This lifestyle is not conducive to owning a home.
Disadvantages to Renting
Your Monthly Payment Can Increase
Rents are driven by demand and inflation. In much of the country, rents are on the rise or at all-time highs. When your lease ends, your landlord can and will raise your rent if they can. It is very possible that, over a long period of time, your rent could increase significantly over the cost of owning that same property.
When you rent, you will not build any ownership in a property you could eventually sell. When you pay rent, that money is gone, whereas if you buy, a portion of your payment goes to the principal reduction on your loan. This increases the ownership of the home and acts somewhat like a savings plan.
No Tax Benefits
Renters cannot deduct any portion of their rent from their taxes the way homeowners can deduct their interest paid.
Big Aesthetic Changes Are Out
You will need permission for any changes you want to make to your rental. Most landlords are OK if you want to paint, but you still need to get approval. Any other changes to carpet, appliances, fixtures, etc. need to be negotiated with the landlord.
How To Make A Rent Or Buy Calculation?
Many people have tried to distill the make-or-buy decision down to a purely financial calculation. While it’s true that many numbers are involved, it’s difficult to put a price on certain aspects that homeowners value. For instance, let’s say you may live in an area with the best schools, access to parks, and absolutely no comparable rentals to the type of homes in the neighborhood. How do you value getting your kids into the best school district? How do you value the quality of home you live in when there are no comparable rentals?
So, while this is not an exact science, there are many online tools to help you compare the potential cost of owning a home to the potential rent you’ll pay for a comparable home. The New York Times has a great tool that helps you visualize the different components that go into the decision and gives you a monthly price at which you should consider either buying or renting. While it’s not fully comprehensive, it is one of the best.
Step 2: Get Pre-Approved
So you’ve decided to buy. Before you go out looking at million-dollar mansions, you need to get an idea of what you can afford and how much you can borrow from a bank. If you’ve gone through the buy/rent decision, you may have a good idea of what monthly payment you can afford.
This is a good starting point, but as I pointed out earlier, there are many more costs involved with the purchase of a home, and all of these play into your financing decision. The most significant cash outlay is a down payment — this is usually 20% of the purchase price.
What you do not know at this point is how much money a bank will lend you. So, your first step toward financing a new home is to get pre-approved.
How to Get a Pre-Approval Letter
What Is a Pre-Approval Letter?
In a pre-approval letter, the bank commits in writing that you, the buyer, qualifies for a certain dollar amount the bank will lend to you provided that everything you’ve shown and stated to the bank checks out.
This letter does two very important things:
- Tells you how much house you could buy
- Signals to sellers that you are a serious buyer
This letter does not do the following:
- Tells you how much house you should buy
- Tells you what interest rate you will receive
- Guarantees that you receive your loan
What Do I Need for a Pre-Approval Letter?
In order to obtain a pre-approval letter, you need to contact one or more lenders. You do not need to select any of these lenders as your final choice. All lenders work off of similar formulas, so your number will be in the same ballpark regardless of who you end up choosing. If you don’t like what you’re getting from one lender, try another but no more than three, as this could negatively impact your credit rating.
To get the most accurate pre-approval possible, you’ll need to hand over several documents, including:
- Your W2 earnings statement from your job
- 2-3 months of current pay stubs
- 2 years of tax returns
- 2-3 months of bank statements (checking, savings, brokerage, etc.)
- Your business tax returns for the past two years if you’re self-employed
In addition to these documents, your lender will pull your credit report as part of the process. Your credit score and history are big factors in your pre-approval process. It’s often a good idea to know your credit history in advance so that you’re not surprised by any negative accounts or transactions. Identity theft is a rising problem that often goes undetected until your credit history is pulled.
Most Popular Mortgages
In most financings, there are two types of mortgages: fixed rate mortgages and adjustable rate mortgages (ARM). The main difference is that, in a fixed rate mortgage, your interest rate does not change over the life of the loan, whereas with an ARM your rate is fixed for a period of time but can vary with market interest rates.
This difference has far-reaching consequences. For instance, fixed rates are usually higher but are most appropriate for people who will be in their home for a long time. With ARMs, you take a gamble that rates will remain the same or go down.
Fixed Rate Mortgage
With a fixed rate mortgage, your interest rate is fixed for the duration of your loan. The most common duration of a fixed rate mortgage is 30 years. This means if you make every payment, you will have your house paid off in 30 years. Other terms are available, with 15 years being the next most common, but your lender may even offer 40 or 50 year loan terms.
- Level payments
- You benefit if rates rise
- If rates fall, you can always refinance
- No need to worry — your rate is locked in
Who should get a fixed rate mortgage?
In the current rate environment, almost everyone should get a fixed rate mortgage. If you intend to be in your home for 15 or even 30 years, this is the way to go. You may end up paying slightly more in the short term, but you’ll be sitting pretty if rates rise significantly.
Adjustable Rate Mortgages (ARMs)
With ARMs, your interest rate is fixed for a period of time, then it will fluctuate with market rates. For instance, a five-year ARM keeps your interest rate set for five years. After that, it could go up or down depending on where long-term rates go. Rates are generally lower when compared to fixed rate mortgages, but this is not always the case. There have been periods of time, such as 2008, where ARM rates were above fixed rate mortgages.
- Initial rates are lower than those of fixed rate mortgages
- Lower your initial payments
- May be able to qualify for a higher loan amount
Who should get an ARM?
ARMs were popular in the early 2000s when people were “flipping” houses. While I don’t recommend living in your home for fewer than seven years, an ARM could be the way to go for those who aren’t expecting to stay in a home for long. Another reason would be if you expect to refinance soon. Perhaps your credit is less than perfect but you expect it to get much better in the near future. You could get an ARM and refinance at a better rate a few years later.
The conventional mortgages above usually need to conform to Freddie Mac and Fannie Mae guidelines. Right now, in most markets the maximum loan that can be securitized is $417,000. In areas like New York City and other large cities, this limit is $625,500.
Jumbo loans exist so that people can obtain a larger loan for a home. These loans usually require a higher down payment, better credit, and a higher interest rate.
In a balloon mortgage, you have a fixed rate for a period of time, but your principal is not completely amortized during the period similar to an ARM. How it differs from an ARM is that the entire balance of the principal is due as a balloon payment at the end of that period. While this type of mortgage can lower your monthly payment, it forces a refinance or payoff at a specific point in time. You should have a real clear picture of how you will pay off the balance when the balloon is due; otherwise, you may be forced to refinance at a disadvantageous time.
VA Home Loans
If you’re a veteran, you may be eligible for a VA loan. This loan does not require a down payment, and the VA guarantees the loan for lenders. This loan is offered exclusively to veterans and does not require mortgage insurance to be paid by the buyer. Beware: The rate you receive may be higher than conventional loans or FHA loans.
Federal Housing Administration Loans (FHA)
An FHA loan is government-subsidized, so you can get into a home with as little as a 3.5% down payment. This is often a good option for first-time homebuyers or people with less than perfect credit. The catch is that FHA loans require mortgage insurance to protect the lender. This can be expensive, so make sure you factor it into your monthly payment. If you can afford 5% down or more, you may have better options with conventional mortgages.
The Lending Process
Now that you have an idea of how different types of loans work, you need to prepare for the least exciting part of home buying: the lending process. This process can either go very smoothly, or it can be a bit nerve-wracking depending on your lender and your ability to quickly gather all the required information.
To make this process as pain-free as possible, here is what you should expect.
Qualify and Select a Lender
The lender you choose can have a big impact on your financing process. Most people just look at the rate and choose the best offer based on that. However, you should determine whether or not your lender will also service your loan, or if it’ll be sold to a third party.
Additionally, it’s very important to deal with a lender that can manage your expectations appropriately. To get final approval, the financing process will likely take you all the way to a couple days before closing. At this point, you technically have a contract on a house and have passed all of your contingency windows but have not been fully “approved” for your mortgage. This can be scary. A lender who can walk you through this ahead of time and provide check-ins along the way will give you more peace of mind.
Be sure to do your research and ask for referrals or references. Online resources can be helpful to get an overall feel for a bank’s reputation and if they’re easy or difficult to work with. Just make sure to take anonymous online comments with a grain of salt since every bank will have some people that just can’t stand them!
Down Payment: What It Is and Where to Get It
As stated previously, a down payment is a cash payment that goes toward the cost of your home and reduces your mortgage. A down payment of 20% of the home’s value is usually required when applying for a traditional mortgage. The lender wants you to have a significant stake in your home from day one.
Here are some legitimate sources for your down payment:
- Bank accounts
- Brokerages accounts
- Other sold real estate
What Banks Look For
Banks want to make sure the sources of the money are yours. Banks ask for your banking statements for at least three months. Among other things, the banks use these statements to look for unusual transactions, such as large deposits. They do this to guard against a practice where people have friends transfer money into their account so it looks like they have more. You will have to explain these deposits to ensure they are not coming from any other sources. I’ve had transactions for less than $1000 flagged — it just depends on your lender.
Step 3: Find a Home
Now for the fun part. Finding a home can be an incredibly exciting and emotional experience. Enjoy it. However, remember there are many variables which are out of your control and can prevent you from getting the home you fall in love with — so try to tread lightly!
Home Search Tools
The initial home search can now be easily conducted on the Internet. There are a number of fantastic websites that list all the homes for sale in your area, complete with pictures and important information. Here are the top three:
While Internet searches are great, many times you’ll want to use a realtor with good connections to find that true hidden gem. Because realtors are often apprised on homes that are about to come on the market, you can get a glimpse into a home that nobody else has seen. This is very helpful in a competitive buying market.
What Type of Home Do You Want?
There are many different types of homes to look at, each with their own considerations:
- Old charm vs. new reliability
- Own space with a yard vs. condo with low maintenance
- Investment property vs. single-family home
- Foreclosures and short sales
Many of these trade-offs come down to preferences, but it pays to research many options. Talk to some people who own the type of home you’re looking into for details on the pros and cons.
Home Buying Considerations
If you’re not sure what type of home you want, look at lots of them. Take your time. This is most likely the biggest financial purchase of your life. Once you do know what type of home you want, continue looking at lots of homes.
Doing this serves two main purposes. First, your measure of relative value will evolve. As you see more homes, you will be better equipped to compare home features and prices to hone in on what’s most important to you.
Second, you will likely need a fallback plan. Once you make an offer, much of the home buying process is out of your control. Sellers may stick to their guns on price, other buyers may be interested, or sellers could pull the house off the market. Try to avoid falling in love with one home and create options for yourself. I know, easier said than done!
Step 4: The Offer to Buy a Home
You now have a home you would like to buy. Congratulations! In this next step, you’ll be making your best “offer” to purchase the home from the seller. You’re not actually purchasing the home, but you are agreeing, in principle, to purchase the home provided certain contingencies are met.
There will likely be some negotiation back and forth on price and other various aspects of the offer, so be prepared by committing to your max price and other elements you’re unwilling to part with. Then stick to them!
How to Decide What to Pay
Deciding what to pay is more art than science. Home prices are driven by what the seller wants, what you are willing to pay, and what comparable homes have sold for in the recent past. That said, there are a few things you can do to make a good deal.
- Use Zillow ONLY as a starting point. The algorithm behind it is highly inaccurate because prices are determined by market forces rather than mathematics.
- Have your realtor prepare a Comparative Market Analysis (CMA), otherwise known as “comps.” This will include comparable homes of the same size and finishes to the one you’re looking at.
- Decide on a max price and stick to it. Walk away if you can’t get the seller down. There are plenty of homes out there.
The CMA is your best source of real data. A CMA report should compile information from the comps you should already have seen and include properties that have recently sold, are pending, or are active listings.
A comparables analysis will let you quickly compare important features of homes near you, like square footage, age, number of bedrooms and baths, and the size of major rooms and amenities, such as fireplaces and swimming pools. It should also list other important information, such as property taxes and school districts.
Here is where the art part comes in. Starting with the asking price, you and your agent can make adjustments based on how it stacks up to the comparables on certain features. If the market value you come up with is realistic, and it fits within your comfort zone, you can put that price in the offer.
When you make an offer, it’s customary for the buyer to place a deposit with the realtor. The amount may vary from location to location, but the deposit is designed to disincentivize a buyer to renege on an accepted offer without incurring some loss.
If you deposit $5,000 when your offer has been accepted, and you back out of the deal for any reason other than the reasons laid out in the offer (usually called contingencies), you will forfeit all or part of the $5,000.
What Is a Contingency?
According to Realtor.com, “A contingent offer is pretty standard. It means an offer on a home has been made and the seller has accepted it, but the finalized sale is contingent upon certain criteria that have to be met. These criteria, or contingencies, typically fall under three major categories: appraisal, home inspection, and mortgage approval.”
Usually, these contingencies allow a buyer to back out of the deal and keep their earnest money deposit provided that everything is completed and responses are in by the designated dates. Generally, the fewer contingencies, the stronger your offer looks, but we do not recommend waiving any of these main contingencies.
Home Appraisal Contingency
Your lender will hire an appraisal company to evaluate the fair-market value of the home. If the appraised value comes back as less than the sale price, the appraisal contingency lets you back out of the deal. This is because 1) you don’t want to overpay, and 2) your lender will only want to lend on the appraised value, meaning you’ll likely need to come up with more down payment.
For example, you waive the Home Appraisal Contingency on a $350,000 purchase price, and your appraisal comes back at $300,000. You planned to put down 20%, or $70,000. Now your lender will only lend you 80% of the appraisal value, so you now need to come up with (350,000-(300,000*0.8)), which is $110,000!
Home Inspection Contingency
A seller has all the information about what may be wrong with the home. Fortunately, a home inspection contingency gives the buyer the right to have the home professionally inspected. This protects the buyer in two ways: If something is wrong, you can request it to be fixed or, if it’s big enough, you can back out of the sale completely.
Use a good home inspector — the more critical the better. It’s in your best interest to have the most thorough inspection possible. Many realtors don’t like good home inspectors because they can derail a deal, so take your realtor’s recommendations with a grain of salt.
The Financing Contingency is a double-edged sword since it can potentially let either side out of the deal. Under this contingency, the buyer has a specific time period to obtain a proper mortgage loan. If the buyer can’t get a lender to commit to a loan, the buyer has the right to walk away from the sale and receive their earnest money back.
The dates here are very important. If a lender delays the process and approves your loan after the time period, the seller can technically back out of the deal as well. Some lenders are notoriously slow. Your best bet is to stay very active in the financing process to ensure the loan is approved before the Financing Contingency window is closed.
Personal Contingency Story
In 2013, I tried to purchase a home with a damaged roof. The seller said he would fix it, but he was very vague. I specifically wrote in a contingency on the roof, laying out exactly how I wanted it repaired in accordance with the Insurance Report from when the damage occurred. This dragged on through the inspection contingency, and I kept getting a worse and worse feeling about the property each time I interacted with the seller. The seller was supposed to respond with remedies to the inspection but failed to do so by the required date. I used that violation (and a stern letter from an attorney) to get out of the deal and have my deposit refunded.
Work Together With an Attorney and an Agent
Negotiating the offer is where an agent can add some value, especially for first-time homebuyers. Agents can guide you on what to put in the offer based on their experience and their view of the market. However, it’s always advisable to include a real estate attorney in the process. In some states, only attorneys are allowed to prepare real estate contracts. In others, real estate agents may prepare such contracts using state-approved, pre-printed real estate forms.
Real estate attorneys are not as expensive as you may think. Most have set fees to work on all documents for your real estate transaction. If your real estate agent supplies pre-approved forms, it’s very important to have your attorney craft the specific language in the contract because it may contain points that aren’t in your best interest. Additionally, the terms of the contract may involve many different points besides the purchase price, including financing, contingencies, title work, and closing date. Remember my story about the roof? This is an example of where I got out of a bad situation specifically because I had an attorney draft the offer.
Contents of the Offer to Buy a Home
- Specifies the amount of your offer, and a date and time when the offer expires. A typical expiration time frame is one or two days, but it could be any amount of time you wish.
- Terms of your offer, such as how you propose to finance the purchase, closing date, home inspection, and any other conditions that must be satisfied for your offer to hold.
- Any other contingencies you specify.
What Happens Next?
Once you’ve crafted your best offer, your agent sends it to the seller’s agent, who then delivers your offer to the seller. If the seller accepts the offer as written, they will sign it and get the document back to you within the specified time limit. Congrats! You are now legally bound by its terms and are on your way to buying the house. You will then send a check or money order that is your good faith “earnest money” deposit.
At this point, the seller can completely reject your offer. However, if the offer is close, the seller will likely counteroffer by modifying a number of clauses. They may not like your price, want a different closing date, or any number of things.
If a seller counter offers, you now have three options. First, accept and sign the counteroffer as written; second, reject the counteroffer and walk away from the home; or counteroffer yourself. You can counter offer as many times as you want until you reach an agreement or one of you rejects the current offer.
The signing of an agreement triggers several tasks that must be completed in the time frame laid out in the contract. Most of these tasks are for you, the buyer. Among these tasks are:
- Seller must make full disclosure of anything defective on the property.
- Buyer must get the loan process started with the lender.
- Lender will then order an appraisal.
- Buyer must schedule a home inspection.
Congratulations! You are off and running. What comes next is mostly a lot of waiting and answering questions.
Step 5: Get An Inspection
Remember the home inspection contingency? Now is when you implement it. Most sellers want a fast turnaround on an inspection, so get moving quickly. Find the best inspector you can. Take recommendations from your realtor, but remember that some of the best, most critical inspectors are considered “deal killers” by realtors, so perform your own research to find one. You want the most thorough inspection possible.
Plan to be present during the inspection. You want to walk through the entire home with the inspector so you can get a good feel for everything in the home as well as what major issues need to be addressed and why.
If the inspector finds any major issues with the home, you can amend the contract by requesting that those issues be fixed. If you and the seller can’t agree on the proper remedies, you can use the inspection contingency to back out of the deal. You can use this as negotiation leverage since, now that the seller is aware of a major defect, they are compelled to disclose this to any other interested buyer. If they have to fix it, they might as well fix it for you.
Always remember that the specific dates in the contract matter, so get the inspection done and respond by the dates specified.
Step 6: Securing Financing
It’s a little nerve-wracking to be this far in the home-buying process and still not know for sure if your bank will come through with financing, but that’s exactly the situation you’re in right now! You’ve got a contract, your appraisal is good, you’ve passed the inspection phase, and now you’re waiting for your banker to say: “APPROVED!”
Here is where it pays to be very, very proactive. You’ve already provided all of the information requested by the lender, but this is when lenders get very picky, as they are actually looking through all of your information to identify any red flags. There isn’t much you can do at this point. Just be aware that, in many cases, lenders will make last-minute requests for information they may have overlooked, such as:
- Written verification of certain deposits
- Proof of insurance
- Copies of agreements
- Additional months of bank statements
- Canceled checks from certain transactions
This can go on right up to your closing date. If your lender doesn’t get their act together, you may miss your closing and have to reschedule. You might have movers coming or other services scheduled that will also be affected. While this interruption is rare, it does happen from time to time.
Step 7: Closing
The closing is where the action is. This is where you sign every document and get the keys to your new house. Most people want to rush through this and get into their new home, but there are many people involved and everything must be in order. Problems do occur, so leave plenty of time.
At closing, you may be face to face with the seller but, in some regions, you can appoint an attorney to handle the closing. If you use an attorney, make sure you are available to answer any questions that may come up.
What Documents Are You Signing?
When you buy a home, you actually have two separate closings. First, you sign all sorts of documents to close your loan. Second are all the documents related to the purchase of your physical home.
Depending on your region and lender, the number of documents for you to sign will vary. Here are the main ones:
- Promissory Note: This document states you promise to pay back the money you’re borrowing. It usually shows your installment plan, rate, and other important provisions, such as what the bank can do if you fail to pay.
- Truth In Lending Statement: This paper is mandated by the federal government. It shows your interest rate, annual percentage rate, the amount being financed, and the total cost of the loan over its life.
- Mortgage or Deed of Trust: This document pledges your new home as collateral for the loan you now owe. The lender puts a “lien” on the property.
- Monthly Payment Letter: This document shows your monthly mortgage payment and how much of it goes toward principal, interest, taxes, and insurance.
Home Closing Documents
Here are the documents that make the home yours.
- HUD-1 Settlement Form: This document itemizes the buyer’s and seller’s closing costs separately. Make sure all the fees are accurate.
- Warranty Deed or Title: This contains the legal description of the property and transfers the title on the home from the seller to you, the buyer.
- Statement of Information: Sometimes called a Statement of Identity, this document is used by the title company to eliminate any confusion between you and anyone with a similar name.
- Declaration of Reports: This document states that you have seen and signed off on all the inspection and survey reports done on the property.
- Abstract of Title: This lists all recorded documents affecting title to the property.
- Certificate of Occupancy:If your home is new construction, you might see this one. This document is issued by the building department and allows buyers of new construction to move in.
What Should You Bring to the Closing?
- Photo ID. A driver’s license or current passport is sufficient.
- A certified or cashier’s check if you have not wired the money to the closing company yet. The amount of the check will have to cover the down payment plus the closing costs, which are 3% to 5% of your home purchase price minus your earnest money deposit. It’s a good idea to make the check out for more than your costs just in case. You will receive a check back for any overpayment.
- Proof of insurance. Your lender will require you to buy a homeowner’s insurance policy. The closing agent needs to see proof that you have the home insurance in effect on closing day.
- Your sales contract. Have your original contract to reference in the event there are any details or costs you need to double check.
- Your attorney. It’s a good idea to have someone who can understand the documents and knows the process. They can let you know if something is off.
- Your agent. He or she will want to be there anyway to get paid.
Congratulations! Now go enjoy your new home.
What Can Go Wrong at Closing?
So much is involved in a closing that things do go wrong. Here are the most frequent reasons:
- Document errors
- Money — you didn’t come with enough of it
- Lender fails to deliver the loan package in time
- Title problems — outstanding liens or other issues
- Last-minute requests from your lender
What Are My Closing Costs?
Here are many of the buyer-paid closing fees. These costs can run between 1% and 3% of your home price.
- Loan origination fee
- Loan discount or “points”
- Application fee
- Appraisal fee
- Credit report fee
- Inspection fee for lender
- Mortgage insurance if applicable
- Attorney fee
- Prepaid interest
- Home insurance
- Property taxes
- Title search
- Title insurance
- Document preparation
- Recording fee
- Transfer tax
What Is an Escrow?
Escrow basically means that funds are being held by a third party to ensure some payment at a later date. The most commonly used version of this is with your lender. Your lender may set up an “escrow account.” This process takes the portion of your mortgage payment that goes toward property taxes or insurance and holds this money in an account, then automatically pays those bills when they are due.
The other way escrow is used is at closing. You deposit funds with the closing agent to pay all the necessary closing costs. This money is held “in escrow” until everything is finalized with the closing. Then, the “escrow” is closed. When this happens, the funds that have been held will be returned to you in the form of a check along with a statement detailing the use of funds and what is owed to you.