So You Want to Buy a House? A Guide for First-Time Homebuyers, Part 2

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In the first installment of our guide for first-time homebuyers, we discussed the first steps of purchasing your new home: figuring how much house you can afford, getting prequalified, finding an agent and starting your search.

In this article, we'll look at the next steps. We're getting down to the nitty-gritty here, so roll up your sleeves and let's get to work!

OK, so you've found your dream home and have put in an offer… and it's been accepted! Here's what to do next.

Get a Home Inspection

A home is likely the biggest purchase you'll make in your lifetime. So, get a professional and thorough home inspection to uncover any not-too-obvious problems before you buy. An inspection costs between $200 and $500, but don't let the cost deter you. Without an inspection, you could be buying a money pit. Even with a brand new house, there may be hidden problems that only a professional inspector will find.

Your real estate agent can provide a recommended list of licensed inspectors. Or look for someone who is certified by the American Society of Home Inspectors. Your purchase offer contract should be contingent on the results of the professional inspection. This means that if the inspection turns up something like a really bad termite infestation or structural cracks in the foundation, you can either back out of the contract and get your earnest money deposit returned, or you can negotiate with the seller to get the issues repaired to your satisfaction.

Your inspector will focus primarily on structural and mechanical issues. He'll look for cracks in the foundation, signs of water damage and mold, and the electrical, plumbing, heating and air conditioning systems, as well as any safety and hazard issues.

Most inspectors will provide a detailed list of every major and minor defect found and alert you to major maintenance and repair issues you should expect and budget for, such as a water heater that is past its useful life expectancy.

No house is perfect, and inspection reports can scare buyers with pages of “repair or replace” items that sound catastrophic. But that's the inspector's job — to point out all issues of any concern now or in the near future. A home inspection is not the time to ask the seller to repair minor issues that were obvious on a walkthrough before you made the offer. Rather, your offer price should have been low enough to cover the cost of minor repairs and updates you intend to make as the new owner.

Escrow — What's That All About?

An escrow is a financial arrangement in which a third party holds the money for you and the seller. When you buy a house, you deposit your money into the escrow account, and the seller receives this money when you've received title to the house (explained below). But you don't have to worry about all this. Your realtor pretty much takes care of all this for you after receiving your check.

But once you own the house, there are other expenses you never had to worry about when you were renting. And your mortgage company will use an escrow company for these expenses. These expenses include insurance, property taxes and homeowners association (HOA) dues.

To protect their interests, your mortgage company wants to ensure these items get paid in full and on time. Typically, your lender will collect a portion of these anticipated expenses as part of your monthly mortgage payment. For example, if an insurance policy costs $1,200 per year, your lender will collect $100 per month as part of your regular mortgage payment and hold those funds “in escrow” until the insurance policy comes up for renewal. The lender will then pay the insurance dues on your behalf out of your escrow account.

At the end of the year, the lender adjusts your monthly escrow balance based on the actual payments that were disbursed. If there's a shortage — because taxes increased, for example — your lender will likely increase your future mortgage payments to ensure they have sufficient funds to pay these expenses moving forward.

Deeds, Titles and Title Insurance

If you own a property, your name is on the deed. A deed is the legal document by which an owner transfers his right of ownership, called the title, to another owner.

Before ownership can be transferred, a title search needs to be done to ensure there are no outstanding claims on the property that need to be settled. The title company will research the history of transactions and prepare a title report verifying that the title to the property is clear — that is, there are no liens on the property and no one but the seller has a claim to any part of it. Title insurance protects you and the lender from any legal challenges that may arise later if something didn't show up during the title search.

If there is anything wrong with the title (known as a cloud or defect), the seller will need to fix it so the sale can proceed, or let you walk away. Both the title report and title insurance are required by your lender and paid for by the buyer at the settlement closing.

Who Pays for What in a Typical Real Estate Transaction?

No real estate transaction is identical and who pays for what is negotiable. However, there are items that typically fall on the seller's shoulders or the buyer's shoulders.

Seller Typically Pays For:

  • Half of the property transfer taxes and recordation fees (state and local)
  • Real estate commission fees
  • Home warranty policy (if provided to the buyer)
  • Any judgments and liens on the property
  • Interest accrued to lender being paid off and any prepayment penalties
  • Reconveyance fee (for lender removing their lien from the property)

Buyer Typically Pays For:

  • Half of the property transfer taxes and recordation fees (state and local)
  • Title search and title insurance policy
  • Property inspections
  • Home value appraisal
  • Document preparation fees (attorney and administrative)
  • Homeowner's insurance policy
  • Home warranty policy (if desired and not provided by the seller)
  • Loan origination fees

Conclusion

Buying a house can be scary. Now that you know the basics, though, you are better prepared to venture into the joy of home ownership.

Have you bought a house? If so, what was your favorite part of the process? Let us know in the comments section below.

Ruth Lyons

Trading three decades of financial publishing experience in the corporate world for a life of personal and financial freedom as a freelancer in 2012, Ruth is passionate about helping others take control of their personal finances and to become aware and educated on their options as self-reliant individuals. Disenfranchised with the high cost and lackluster performance of her IRA, college savings and other retirement accounts handled by a full-service broker, Ruth moved her retirement money to a self-directed IRA in 2015. Ruth holds an MS in Finance from Johns Hopkins Carey School of Business (1991) and a Business Management degree from University of Maryland (1984). You can follow Ruth on: Twitter

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