The Home Buying Process
The Contract
When you are ready to tender an offer to purchase a home, your sales agent or broker will assist you in the preparation of the contract to present to the seller. This is a written offer to purchase a home at a given price with additional provisions regarding mortgage financing and personal property to be included in the sale. It is usually accompanied by a nominal earnest money deposit to show the serious nature of your offer.
Once accepted by the seller, this is interpreted to be a formal agreement. A purchaser can risk the loss of their earnest money deposit if provisions are not made for a “change of heart.”
It should be subject to review by an attorney as to the technical aspects and the purchaser’s responsibilities and the conditions under which you are agreeing to purchase the home. If the offer is being made on an existing home, the contract should also be subject to a satisfactory inspection of the dwelling by a licensed engineer.
Once the contract is executed, the parties are bounded by the terms and conditions negotiated by the parties. It is the primary role of the real estate attorney to ensure that purchasers fully understand their obligations.
A basic real estate contract contains the essential terms of the transaction, names of the parties, purchase price, terms of financing the purchase, the personal property to be included in the sale and approximate closing date.
In addition, the contract should contain three (3) key contingencies
- Good and marketable title – a seller must be able to transfer “good and marketable” title to the property; basically the seller must transfer title free and clear of all judgments, mortgages and other liens which may exist against the property. In addition, the property must be free of violations of any ordinances. If the seller cannot convey title, the purchaser may cancel the contract and the contract down payment shall be returned.
- Mortgages – Almost every real estate contract is subject to the purchaser being able to obtain a mortgage commitment from a lender. A purchaser is usually given between 45 to 60 days to obtain a loan commitment by the seller. A purchaser must act in good faith, promptly apply for a mortgage loan, and fully cooperate with the request of this lender during this process. If the purchaser cannot obtain a mortgage commitment, usually either party may cancel the contract, and the contract down payment shall be returned.
- The Inspection – Generally, when a purchaser purchases an existing home, it is offered by the seller in “AS IS” condition subject to the promise, or warranty, by the seller that the major operating systems shall be in working order at the closing of title. And engineer’s inspection goes beyond the basic operating systems and reviews the entire structure. An engineer’s inspection is not a guaranty; it is an informational report to be used by a purchaser as a guide to make the final decision to purchase a home. The cost of the inspection is usually borne by the purchaser.
The Real Estate Contract outlines the terms and conditions by which the sellers have agreed to sell and the buyers have agreed to buy
In particular, it states the basic responsibilities of both the Seller and the Buyer. Once the contract is signed by both parties, they are bound to those terms and conditions. If a contract is not well written, it can lead to problems, delays or even the cancellation of your closing!
The key to a smooth sale of your home is knowing that you have the documents necessary to close the deal before you sign the contract. If a document is not available, or does not exist (as may be the case regarding a Certificate of Occupancy), the contract must be drafted to keep the seller in control by giving you enough time to obtain that document prior to closing. From the Seller’s perspective, if all the paperwork is in place, the contract should be subject only to the buyer obtaining the necessary financing to complete the sale.
Typical buying process
- Preparing for Closing – Once all the contingencies are met, the seller and purchaser are prepared to proceed to closing. The setting of the closing is usually coordinated by the purchaser’s attorney. The following parties must appear at a closing: the seller, the purchaser, their respective attorneys and the lender’s attorney. In addition, the purchaser must gather the required monies to pay the balance of their down payment plus their closing costs.
- The Closing – A real estate closing may appear to be a bewildering flurry of papers, but it boils down to three independent events occurring simultaneously. First, the purchaser receives title to their home. Second, the bank closes it’s loan and issues its loan proceeds to the purchaser, who in turn transfers them to the seller as part of the balance of the purchase price. Third, the title company guarantees both the bank and the purchaser that the purchaser is obtaining good and marketable title. After the closing, you will receive a closing statement from your attorney detailing the financial aspects of the closing and copies of the documents executed at the closing.
Please be reminded that each property is unique and each contract has its own characteristics and problems, which may be encountered. A good real estate attorney will assist you to avoid the pitfalls that may arise so that your home purchase will proceed smoothly from start to finish.
Closing Costs
Closing costs are those expenses associated with the purchase of a property other than the contract down payment. Closing costs fall into two major categories: Bank Related Expenses and Title Related Expenses.
Bank Related Expenses
These expenses are those incurred in obtaining the mortgage to complete your purchase. They include:
- Points – A point, equal to one (1%) percent of the amount of the mortgage, is a fee paid to either the lender, or its designate (in the case where a mortgage broker has placed the loan), for the opportunity to obtain a mortgage loan from that lender. Points are 100@ tax deductible when the mortgage is used to purchase a primary residence.
- Mortgage Bank’s Attorney – Unfortunately, a purchaser is customarily obligated to pay the bank attorney’s fee, in addition to their own attorney’s fee, as a condition of obtaining the mortgage. This fee ranges from $400 to $700 depending on the lender.
- Tax Escrow – Most lenders will undertake to pay the real estate taxes on properties it grants mortgages against. In order to have sufficient monies to pay these taxes, a lender will require a purchaser to deposit 1/12th of the annual real estate tax bill in an escrow account with the lender, along with the monthly mortgage payment. In addition, a purchaser will be required to make an initial deposit in order to have sufficient funds set aside to make the first tax payment after closing of title.
- Private Mortgage Insurance (PMI) – Anytime a purchaser borrows in excess of 80% of the purchase price from a lender, that lender will require that the purchaser obtain private mortgage insurance from a third party provider. The lender will arrange for this coverage and pass the cost through to the purchaser. This coverage must remain in place until the principal balance of the mortgage falls below 80% of the value of the property. The first year’s premium must be paid at closing, and varies according to the amount of the mortgage.
- Homeowners Insurance – A lender will also require that a purchaser maintain homeowners insurance in an amount necessary to replace the dwelling house. In addition, most lenders require that the first year’s premium be paid in advance of the closing.
- Miscellaneous Fees – Lenders shall also assess various fees depending upon their internal procedures. Some of these fees include: Tax Service Fees, Document Preparation Fees, and Application and Credit Fees. These fees vary depending on the particular lender.
Title Related Expenses
These expenses are those required to complete the transfer of title and to record the necessary documents associated with the closing. They include:
- Title Insurance – Required by all mortgage lenders, title insurance guarantees that the purchaser is obtaining good and marketable title from the seller. This one time expense, set by statute, varies according to the purchase price of the home and the location.
- Departmental Searches – As part of the title search an abstract company will check the municipal records to ensure that the property is in compliance with the local ordinances affecting real property as well as the survey of the property. The fee for these reports varies depending on the municipality.
- Mortgage Recording Tax – Anytime a mortgage is recorded in the State of New York, there is a one time fee assessed against the purchaser. This “tax” in not tax deductible.
- Recording Fees – In addition to the mortgage recording tax, the purchaser is obligated to pay a nominal fee to the County Clerk to record the original mortgage and deed. This one time expense varies according to the county. In addition there is an Equalization and Assessment Fee filed with every deed to notify the County with new owner information.
The only other closing cost not outlined above is the purchaser’s attorney’s fee. While attorney fees vary, a reasonable fee charged by a skilled real estate attorney is always a wise investment. Contact Marchioni & Associates and let our experienced team help with your real estate transaction.
Marchioni & Associates Law Firm
2024 West Henrietta Road
Brighton Campus Park, Suite 3G
Rochester, New York 14623
Phone: 585.272.7870
