Legal Considerations

As you get nearer to the purchase of your new home you will need to have a attorney to represent you in the sale. Asking friends and neighbors for referrals is a good way to find a real estate lawyer. Your real estate agent may be able to refer an experienced attorney. Just make sure the attorney you hire specializes in real estate and has expertise in the areas you require. Also be sure to establish what the lawyer's fee are for closing a house.


The Sales Contract

Remember that your offer to buy the property is dependent on the negotiation of a satisfactory contract. In addition to the basic terms of the sale that were already included in your offer to buy, certain contingencies may be included in the contract. These are conditions that must be met for the contract to take effect. Some contingencies and other provisions that are commonly written into a contact are summarized here.

Financing contingency
The contract should state the purchase price, the amount of the down payment, the total loan amount , and the exact financing terms you will accept - as well as how long you have to find the agreed-upon financing. It will also state the amount of deposit being held in escrow, and which closing costs are to be paid by the buyer and which are to be paid by the seller. This contingency makes it clear that if you do not get the money you need at the terms you have specified, the deal is off and your deposit will be refunded.

Inspection contingency
Your contract should be contingent on a satisfactory report by a professional home inspector. If any major problems with the structure or systems of the house are uncovered, you have the right not to go ahead with the purchase or to renegotiate the terms of the purchase. You may also make your offer contingent on certain specific inspections, such as those for termite damage, lead paint, or asbestos.

Appraisal contingency
When you apply for a loan, the lender will require a professional appraisal of the market value of the property. The appraised value of the house determines how large a mortgage the lender will be willing to give you. If the appraised value is lower than the agreed-upon purchase price, this contingency gives you the right to withdraw your offer.



The Home Inspection

The intention of the pre-purchase inspection is to provide the buyer with useful information about the condition of the residence and identify major deficiencies in the home's structure, its systems and components. A home inspector is a professional who has been trained to examine the visual condition of residential properties and determine if they are free from discoverable major mechanical (heating, plumbing, electrical, etc.) or structural (walls, roof, foundation, etc.) deficiencies.

A professional home inspector will tell you if the roof or heating system will soon need major repair or replacement, and whether the electrical and plumbing systems are functioning properly. The inspector will let you know whether the major mechanical/structural systems are in overall satisfactory condition or if defects are discovered he will suggest repair methods.

You should expect a permanent report of your inspection, either written or video taped. The report should describe the condition of the home at the time of the inspection based upon the inspectors visual observations. By following the inspector as he tours your house, by observing and asking questions, you will learn a great deal about your new home and how to maintain it.

You can ask your friends and neighbors to recommend a home inspector. Your real estate agent may also have suggestions.

What Home Inspectors Look For:
  • stains on basement walls
  • moss, mildew, or stains on lower siding
  • stains or mildew on underside of roof
  • soggy areas in yard
  • eroded areas in walkway or driveway
  • roof that sags in the middle
  • walls that curve in and out
  • windows or doors that look crooked
  • porches that lean or sag
  • diagonal cracks above doors and windows
  • slipping or shifted foundation
  • floors that feel spongy or uneven
  • inside doors or windows that don't fit
  • houses that are built on wood posts or sill beams on ground
  • very high heating or air conditioning bills (ask the owner if you can look at the bills)
  • leaking plumbing, especially the main water line (turn on the water and look at the pipes)
  • main electrical service that is too small (turn on lots of lights and appliances at the same time to see if they blow a fuse or circuit breaker)
  • extension cords running a long way
  • odd smells, such as sewer gas
  • lack of insulation in attic (there should be thick insulation on the floor or ceiling)
  • signs of termites or ants
  • old flaky paint on sills or trim
  • flaky paint on the outside
  • floor covering that is worn in large areas
  • siding that is wavy or spongy underneath
  • roof cover that is seriously worn or has many layers

Repaying your Mortgage

Your mortgage payment is now your most important bill each month. You have borrowed a great deal of money to buy a house and this loan is a serious financial obligation. If you do not keep your mortgage payments current, you may lose your house. If you can foresee financial difficulties, act quickly! Call your mortgage lender and explain what is happening. They may be able to help you develop a "workout plan."

Defaulting on your mortgage
A mortgage default means that you violated one or several of the terms of your mortgage agreement. Your mortgage agreement lists all of the terms and obligations of your mortgage. The most obvious default is failure to make a payment. However, a number of other things can be classified as defaults as well. These include things such as failing to have adequate insurance on your property, failing to pay your property taxes, putting another mortgage on the property, failing to keep the property in good repair, and selling the property without the bank's consent.

The day of the month on which your mortgage payment is due, usually the first day of the month, is set out in the mortgage note. Your payment is considered late of the lender receives it after the due date. If a payment has still not been made within 30 days of the due date, the loan is considered to be in default. If you owe two or more mortgage payments, your home is in serious jeopardy. Unless specific arrangements are made with your lender, you must remit all payments and late charges before any money will be accepted and the loan considered current.

When three or more mortgage loan payments are due and unpaid, the loan may be given to the lender's attorney and foreclosure proceedings initiated. The entire balance of the loan may be due and payable immediately. In addition to the loan payments due, you are liable for legal fees incurred by the lender. At this point, you are in serious danger of losing your home.

When you have defaulted on your mortgage
Your lender does not want to foreclose on your mortgage. Foreclosure costs them more money than they can make back from the foreclosure sale. Lenders do not foreclose in order to make money, but only reluctantly as a way of limiting losses on a defaulted loan. This is why, if you get behind on your mortgage payments, your lender will work with you to devise a practical plan to cure the default and bring the loan current. You must stay in communication with your lender and be honest in evaluating your financial situation if this plan is to work.

The willingness of the lender to work with you to get past your current problems will depend heavily on your past payment record. If it shows consistently timely payments and no serious defaults, you will find the lender much more receptive than if you have a record of unexplained chronic late payments.

Mortgage loan "workout plans"
A loan workout plan is an agreement between you and your lender that sets out the steps to be taken to cure the delinquency and prevent loss of your home. It may be written or oral and will have specific deadlines which you must meet in order to avoid foreclosure. Therefore, it must be based on very realistic estimates of your ability to meet the plan schedule.

The nature of the workout plan will depend upon the seriousness of the default, whether your financial problems are short-term or your payment ability has been impaired for the foreseeable future, your prospects for obtaining funds to cure the default and the current value of your property.


Tax Planning

Let's look at the advantages of home ownership from a tax standpoint. For many years, the federal government has actively promoted home ownership by providing homeowners with significant tax benefits that are not available to renters. The following is a general discussion of some of the tax benefits associated with home ownership. Please consult your tax advisor for more information.

Income Tax Deductions
Now that you are a homeowner and can deduct the interest you pay on your mortgage and certain other expenses. You will need to use Form 1040 (the "long form").

Interest
The deduction for interest alone may save you thousands of dollars in federal income taxes. Especially in the early years of your mortgage, the bulk of your monthly mortgage payment is interest. For example, suppose you are paying 10 percent interest on an $80,000 fixed-rate mortgage payable over 30 years. Your monthly payments (principal & interest only) are $702, or $8,424 per year. In the first year of the loan, you will pay the lender $7,944 in interest and only $480 in principal! As time goes on, you pay progressively less interest and more principal. The lender will give you a statement each year showing how much interest you have paid and your principal balance at year-end.

In your first year as a homeowner, your tax break may be even larger since any points you paid to the lender in the process of obtaining your mortgage also count as an interest payment.

Property Taxes
Federal law also allows a deduction for taxes on real property paid to state or local jurisdictions. This means that as a homeowner, your real estate (or property) taxes are deductible. Some states also allow you to take deductions for these taxes, in some jurisdictions, low- to moderate-income homeowners may qualify for a full or partial property tax abatement.

Moving Expenses
You may be able to deduct certain of your moving expenses if the move to your new home was job-related and certain other requirements are satisfied.

Capital Gains Deferment
Generally, when you sell something for more than you paid for it, you must pay a "capital gains" tax on the increase. Again, homeowners receive preferential treatment. When you sell your home at a profit, you can defer paying taxes on the gain, provided you buy another home within two years that costs as much or more than the sale price of your previous home. In the event you sell your home for less than you paid for it, you may have a capital loss. Such a loss may not be taken as a deduction.

This favorable tax treatment allows homeowners to "trade up" for increasingly expensive homes without a tax bite. Moreover, once you are age 55 or older, you can sell your home without purchasing another home and still be eligible for a one-time exclusion of gain up to $125,000.

Keeping Records
For tax purposes it's important to keep accurate and complete records of the cost of any improvements you make to your house. Although the cost of improvements is not deductible, they increase your home's "basis" which in turn determines the amount of your gain for tax purposes when you sell it. Some of the closing costs you incurred when you bought your house also can increase your home's "basis" when you sell.


Step 8 - The Closing