First-Time Homebuyer’s Guide: Part 5
You’ve successfully applied for your perfect mortgage with the best available rate. The pre-approval letter you secured in the process has prompted a quick reply from the seller’s agent to yours. They know you mean business, and now it’s time to take the final step in your first home purchase: closing the deal! First, make sure a qualified professional gives the home a thorough inspection. It’s also important to understand your closing costs and the concept of escrow so you’re not caught off-guard at the last moment. Once the home purchase is final, the only thing left to do is move in!
While you surely can’t wait to move in and realize the dream of home ownership, your loan officer and real estate agent will undoubtedly advise you to pause for a home inspection.
What do home inspectors do?
They evaluate the roof, foundation and the integrity of electrical wiring and plumbing. They also search for what the untrained eye could miss, such as water or moisture in places it shouldn’t be.
Should I be there for the home inspection?
Absolutely—there is no better way to get acclimated with what you hope will be your new home. Remember, the inspector works for you. You want to be confident that the property is worthy of purchase at the negotiated price.
What happens after the home inspection?
Home inspectors have 24–48 hours to detail their findings in a written report. After you receive the inspection report and the seller’s disclosure statement, you’ll be well equipped to make an informed purchase decision.
How do I find a home inspector and what will it cost?
The American Society of Home Inspectors (ASHI.org) is a good starting point. The site offers an abundance of details about the home inspection process and includes a tool in which you can search for inspectors by location. Your real estate agent may also work with a respected professional and can help you arrange the inspection.
The most challenging step of buying a new home is often the last one. Lender transparency throughout the process is essential, and it’s never more important than when you’re confronted with fees and costs at the closing table.
Within three days of receiving your loan application, your lender must provide a loan estimate document that gives you a good idea of the terms and costs of your potential home purchase. Then, at least three business days before closing, your lender has to provide you a loan disclosure document that lists the actual terms and costs of your pending home purchase. These two documents may not reflect identical figures, but they shouldn’t vary significantly. If they do, make sure your LO explains why.
Below are some common costs and fees you can expect to see at the closing table and what they mean:
- Costs associated with the lender processing a loan application.
- A report that the sale price is an accurate reflection of the home’s fair market value.
- Depending on the size and complexity of the purchase, legal costs can be realized by multiple parties, including the lender.
- Some lenders will charge you to pull credit scores.
- This is a basic handling fee, and one of a few that typically figures into the Loan Origination fee (see below).
- The lender will require that you protect the home against natural disasters, theft and other incidents.
- A fee that can include a number of different costs, including the lender’s underwriting, processing and closing costs.
- If the down payment is below a certain percentage of the home’s sale price—20% is the typical benchmark—the lender will often require that you purchase private mortgage insurance (PMI).
Points or loan discount
- You may have an option to pay interest to the lender up front, thereby lowering the mortgage interest rate. This will save money in the long run, but if you plan to move relatively soon it may not make sense.
- Pro-rated property taxes will be assessed at the closing table.
- This fee reflects the cost associated with the government creating an official change of ownership.
FHA, VA and USDA
- These fees are applied to borrowers with home loans backed by one of the three government entities. They’re called ‘insurance premiums’ by the FHA and ‘guarantee fees’ by the VA and USDA.
- A report that reflects the accurate assessment of lot size and dimensions. Guards against claims made on the home after closing.
- Performed to ensure there are no outstanding liens against the property and that the seller owns it.
Among the costs associated with a home purchase is the funding of an escrow account. Mortgage escrow refers to a neutral third party that holds funds or documents during a transaction.
What is it for?
Your mortgage payment consists of property taxes, home insurance, principal and interest, together abbreviated as “PITI.” While “PI” is constant (within a fixed-rate mortgage and during the fixed period of an adjustable rate mortgage), the “TI” portion is variable. It would be difficult for many homeowners to manage four different payments at a staggered cadence. Mortgage escrow decreases the risk of borrower default by organizing and distributing funds to each of these loan obligations. This takes the accounting tasks and maintenance off your plate, letting you make singular monthly payments instead of four separate payments at different times.
Is it legally required?
It depends on the loan. The Federal Housing Administration (FHA) requires mortgage escrow to pay TI and mortgage insurance premiums (MIPs). Retail lenders have varying policies, with some requiring it and others waiving it with little or no consequence.
What's the benefit?
Mortgage escrow offers financial regularity that may be difficult to manage independently. TI is typically due bi-annually, whereas PI is due every month. With the mortgage escrow account, your lender splits the total PITI into 1/12 portions. This helps you manage staggered expenses and avoid bulk payments.
What's the drawback
While your money sits in escrow, it typically does just that: sits there, not earning interest. Depending on where you live, it may be wise to manage payments on your own and keep the funds in an interest-bearing account.
How do I know if I need it?
There are a number of factors that determine whether a mortgage escrow is right for you. They are:
1. Loan type
- If you have an FHA loan, you don’t have the option to waive escrow. If you have a conventional loan, you can likely waive escrow, but it may not be to your advantage.
2. Financial stability
- If you’ve always been good with financial planning and saving, then paying TI every six months and PI every month won’t be a big challenge for you.
- Your lender may discourage you from waiving escrow by charging you directly or increasing the loan’s interest rate. Know where your lender stands on this issue prior to closing.
- If you live in a state where escrow accounts bear interest, there’s probably little reason to waive it.
Congratulations! You are the proud owner of a new home! Before you get completely settled in, however, there are a few ‘to-dos’ that need your attention.
Inspect your home
- The purchase price you agreed upon with the seller assumes that the house will be in the same state as it was during the inspection. When you move in, take time to give your home another walk-through, making sure nothing looks out of place or damaged.
- It’s hard to enjoy your new home if you don’t have heat, running water or working appliances. Once your home purchase is final, one of the first things you should do is call the local public works office and utility companies to establish running water, electricity and gas.
- Assuming you want a cold place to store food, a hot place to cook food and a wet place to clean clothes and utensils, you’ll need to connect your appliances if they aren’t already hooked up. Professionals from the appliance makers are usually happy to provide this service, so if you’re not comfortable doing it yourself, make sure to call ahead to coordinate the installation with your move-in date.
Install cable and internet
- After a long day of unpacking, organizing and installing, it might be nice to order some food online and unwind by the tube for your favorite show. Again, this requires that you call ahead to the cable company to schedule a visit during the big day.
- In the rush to get everything in the house and unpack, it’s easy to overlook the smoke and carbon monoxide detectors. Replace the batteries in these small but extremely important items, and test them to make sure they’re in working order.
- To start receiving mail at your new address, you must officially inform the U.S. Postal Service. Most post offices will have mover’s guides that contain the appropriate form, or you can go to USPS.com and update your address online.
- If you’re moving to a new state, you’ll need to register your car with the department of motor vehicles. While you’re at it, it’s also a good idea to get a new driver’s license that reflects your current address.