For most people, your home purchase will be your biggest financial investment you will ever face. Buying your first home is one of the most exciting things you can do, but it’s also one of the scariest. Suddenly, a large sum of your monthly income is spent on your mortgage and unexpected maintenance such as electrical repairs, insulation, and re-roofing. The expenses can add up, and what once was a seemingly sound investment can turn into a huge regret.
Here’s a list of things every new homeowner should know as they become homeowners.
Lender Responsibilities: TILA and RESPA Requirements
Finding the right lender is just as important as finding the right home. Some lenders make promises they can’t keep, and borrowers suffer as a result. Lenders who are unable to provide funding can result in the borrower losing their earnest money deposit and the offer on the home. It is important to find a lender that you feel you can work with and who can get you a good mortgage insurance rate.
Lenders are bound by Federal laws such as the Truth in Lending Act (“TILA”) and Real Estate Settlement Procedures Act (“RESPA”). These regulations were enacted to protect consumers in their dealings with lenders and creditors. All lenders must provide their customers with disclosures consistent with TILA and RESPA before closing. These requirements include a loan estimate and closing disclosure, which contains the final details about the mortgage loan, such as projected monthly payments, loan terms, and how much you will pay in fees and closing.
What Happens if Something Affects the Property?
Say you found your home, you’re in escrow, and you’re waiting to close, but then the unthinkable happens: a fire breaks out and destroys the property, or a random “Act of God.” What happens then?
If the purchase contract between the parties does not specify who is to bear the risk of damage or loss between execution of the purchase contract and close of escrow, the liability of the parties is governed by the state in which the property resides. Each state is different. For instance, California statute assumes no fault on the part of the buyer for the risk of loss or damage to the premises. In that regard, the seller bears the risk should the property unexpectedly go up in flames.
If all or a material part of the premises are damaged before title or possession is given to the buyer in California, the buyer can cancel the contract and recover any portion of the purchase price paid. If, however, the “Act of God” occurs after the buyer has taken possession or received title, the buyer bears the risk of loss or damages to the premises. Thus, if the premises are damaged, the buyer still must complete the contract and pay the balance of the purchase.
Title Insurance
Another thing to consider when buying your first home is title insurance. When you purchase your house, you may not realize that it is encumbered. In other words, a third party may have legal right to your land which may be superior to yours and restricts your ability to use and enjoy your land. Sometimes, the encumbrance is minor. Other encumbrances may be more substantial.
For example, a government agency may have a utility easement running through your property which prevents you from building that Olympic-size swimming pool you always dreamed of.
Title insurance is meant to protect against these types of unforeseen property disputes by searching the property’s title history before you purchase. The title history should disclose what rights others may have with respect to the property.
Moreover, title insurance insures against any additional “defects” which were not found through the title search and not otherwise expected or excluded in the policy. Depending on the type of title insurance, the insurance may be able to pay off your mortgage in the event that a defect causes you to lose the property. If you buy a property using a home loan, your lender will require that you also obtain title insurance.