Buying a home is one of the biggest – if not THE biggest – expenditure you will make. This outline summarizes for prospective home buyers the more important legal and non-legal considerations they may face when purchasing a home.
As a buyer, one of the first steps in buying a home is to determine how much you can afford to pay. You should meet with at least one lender and try to estimate how much of a mortgage loan you may expect to obtain under the lender’s guidelines. You also should determine the lender’s requirement as to the minimum portion of a purchase price (the down payment) which must be provided by the buyer, and how much you can expect to pay in closing costs and other purchase-related expenses. Buyers (especially first-time buyers) are often unprepared for the size of this bill. Buyers also must consider expenses to operate the home once they buy it. Such expenses range from real estate taxes to service charges, utilities, landscaping and maintenance expenses, and your realtor can provide such expenses for any particular home you are interested in.
Investigating the Property
Before committing to the purchase of a house, you should conduct a diligent investigation of the property. You should work closely with your realtor and other advisors to investigate:
Zoning and Building Laws: Is your property, and your neighbor’s, in a residential zone or can you end up with undesirable uses in your neighborhood?
Water and Sewer: Is the property served by public sewer and water? If not, then you should conduct appropriate tests of wells and/or septic systems.
Toxic Waste: Is the property located near a current (or former) source of possible toxic pollutants?
New highway Plans:
Special Assessments: There may be plans for new sewer lines, or curbs, that are not reflected in current bills.
Traffic: Check the routes to where you work, go to school, etc. during normal commuting hours.
Site Inspection: Look for problems like wet spots, encroachments by neighbors and undesirable conditions on neighboring properties. Consider hiring a professional home inspector.
Restrictive Covenants: Make sure that any restrictive covenants in the Deed are not more restrictive than zoning requirements and permit your intended use of the property.
Homeowners’ Associations: Check for your dues, whether other members are paying their dues, any deferred maintenance issues and any additional restrictions on your intended use of the property.
Common Charges: Get a clear statement of monthly charges and any deferred maintenance problems.
Agreement of Sale
After finding what appears to be the right house, many buyers allow the real estate agent to fill out a standard form contract containing the offer to buy. Often buyers do not seek a lawyer until the sellers accept the offer. These people are entering into what is probably the largest financial undertaking of their lives with only the advice of the real estate agent, who often owes his or her loyalty to the sellers. In most instances, the matter proceeds through closing without great difficulty. But sometimes serious problems arise that can affect the financial security of the buyers.
In Pennsylvania a contract for the sale of real estate must be in writing. Often, a standard contract form developed by the local real estate board is provided by a real estate agent. Prospective buyers may present an offer by completing the contract form with the terms they propose. The sellers may then accept the contract, make a counter-offer, or reject the offer. Below is a list of many items buyers can expect in the agreement. If any items are not part of the standard form, buyers should not be reluctant to have them added.
- A provision that the sale is conditional on the buyers’ being able to obtain the kind of financing specified. The contract should clearly state that if the buyers cannot get the kind of loan specified in the contract within a stated period of time, the contract may be canceled and the buyers will be entitled to the return of their deposit.
- A description of the property to be sold, including its address, dimensions, tax identification number, and any other details that will help to identify it clearly. This requires great care because buyers sometimes discover later on that the agreement does not include all the property they had in mind.
- A statement of any known encumbrances that the buyers agree to be acceptable. For example, an easement (right of way) for power lines or a driveway for a neighbor’s property may be acceptable encumbrances. Examine any stated encumbrances carefully.
- A list of the personal property and fixtures that are part of the sale, including furniture, appliances, lighting fixtures, curtains, etc.
- A statement that the purchase is contingent upon a satisfactory inspection for termites (or other wood-eating insects), termite damage, and insect infestation.
- A note of the financial adjustments to be made between the parties for such items as fuel oil left in the tank, prepaid or unpaid taxes and common charges, sewer and water rents, assessments for improvements, etc.
- Any guarantees the sellers are willing to make about the condition of the house. In the case of an old house, the buyers usually accept the property “as is,” although it is often customary for the contract to provide that plumbing, pumps, heating and lighting fixtures, and ranges and built-in kitchen appliances will be in good working order at closing. A contract for a new house frequently contains some guarantees of material and workmanship for at least a year after purchase.
- The time and place of closing. Be careful of any clause stating that “time is of the essence.” This can create a firm date.
- A provision that the buyers shall have the right of inspection of the premises prior to closing.
- A statement that the contract is contingent upon a satisfactory engineer’s report on the property, often called a structural inspection.
- A statement that the contract is contingent upon the buyers’ sale of their present home within a certain period of time. In this matter, it may be customary for the sellers to require an escape clause which allows the sellers to accept a more favorable offer, unless the original buyers are willing to drop the contingency.
Buyers’ expectations of the transaction must be stated in this agreement. For this reason, they should meet with a lawyer before committing themselves. If they must submit their offer quickly, they should at the very least have the contract contain a clause that makes the agreement contingent upon the review and satisfaction of their lawyer. The seller will likely want this review completed within a few days.
Once the agreement is set, arrangements necessary to acquire financing and to transfer the title must receive prompt attention.
Loan Commitment. – As soon as the agreement is final, you should move as quickly as possible to secure any necessary financing. The agreement generally limits the time to secure a loan commitment. Moreover, other requirements for closing generally may not begin until a commitment is secured, since these expenses are wasted if a commitment is not finally obtained.
Survey. – A survey may be well advised if there is any doubt about the boundaries described in the contract. The mortgage lender may require one.
Fire Insurance. – Fire insurance (usually a homeowner’s policy) should be in place by the time of the closing. Where a mortgage loan is to be obtained, the lender will not issue the loan unless appropriate proof of fire insurance protecting the lender is presented.
Title Insurance. – Generally, arrangements will have to be made to acquire title insurance.
The Title insurance company generally will arrange for a title report containing the results of a search of public records. If the search reveals defects in title, liens, or unexpected encumbrances, the title insurance company may not provide the necessary coverage and the closing will be delayed until these matters are resolved.
The Closing. – The closing is the climactic moment at which you acquire legal title to the property. Generally, the closing is a meeting between the parties to the agreement, their lawyers, and others who have an interest in the sale – such as a representative of the mortgage lender, a representative of the company issuing the title insurance, and the real estate agent. At the meeting, they make sure all the necessary documents have been prepared in accordance with the contract and reach agreement on apportionment of various expenses (i.e., real estate taxes, fuel in tanks, and common charges paid to homeowners’ associations). Generally, the agreed amounts will be contained in a closing statement which details all amounts owed between the parties.
The representative of the lender will produce a note and a mortgage document for review by you and your attorney. These documents may be voluminous and difficult to understand, but you should as least ascertain that all the terms you wanted for the mortgage loan are stated in the documents before you sign. After securing signatures, the mortgage lender will be prepared to present a check toward the purchase price, assuming the lender is satisfied with (1) the title insurance documents, (2) the arrangements to satisfy any prior mortgages and other liens, and (3) the arrangements for fire insurance (homeowner’) protection.
The sellers’ lawyer will produce a deed for examination by you and your attorney, the bank’s representative, and the title company. Generally, a proposed deed has been reviewed in advance of the meeting. The written description of the property in the deed should be carefully compared with the agreement, with any survey that may have been made, and with the descriptions in earlier deeds to the same property. When all parties are satisfied with the deed, the sellers will sign the deed and pass it to you. Then the sellers receive the remainder of the purchase price (plus or minus any adjustments). The deed must be recorded with the appropriate authority promptly after the closing.
For your personal financial planning, you should understand the tax laws that have a significant impact on buying and owning a home.
- Home mortgage interest and real estate taxes generally are deductible as a federal itemized deduction, although some limitations may apply. The most significant limitation disallows the interest deduction on the portion of acquisition debt that exceeds $1 million. “Acquisition indebtedness” consists of debt incurred in acquiring or constructing a home plus debt incurred for the purpose of making home improvements that add to a home.
- The deduction of “points” as interest may be limited. Points paid for a mortgage on a principal residence are deductible when paid, to the extent points are charged as a general business practice in the geographic area. Points (loan origination fees, loan processing fees, etc.) paid by a borrower out of his or her own funds to a mortgage lender in order to get a mortgage loan are deductible as interest only if they are solely for the use or forbearance of money and not a charge for services. A commitment fee charged for the lender’s agreement to make a future loan does not qualify as points.
- Buyers who are selling a prior residence should understand the rules for computing gain (e.g., maintain records on costs of home improvements since those costs may be added to the basis of the home and thereby reduce the amount of gain).
- And you should understand the rules for deducting moving expenses.
The purchase of a home is an important transaction – one that should be made with a thorough investigation of the property and with the advice of a team of professionals experienced in real estate.