Buying a home may be the single largest financial commitment you make in your lifetime. It may also be one of the most legally complicated processes you’ve ever encountered. Some home buyers rely on real estate agents to help them navigate the complexities of home purchase, while others will engage an attorney to be sure they’re making the smartest decisions along the way to homeownership. In either case, you’ll be better off if you gain some expertise of your own before diving into the real estate market.
Paper, paper, everywhere paper.
You’re going to do a lot of reading—and signing—when you start shopping for a home. Most homebuyers begin their journey to homeownership by appointing a real estate agent to represent them. Real estate agents do some hard work. They comb through listings to find properties that meet your needs. They help you evaluate whether each home you consider is fairly priced and a good long-term value. They may point you in the direction of mortgage lenders and even the best mortgage rates. And they prepare such documents as your offer to purchase for you. Given the time they invest, real estate agents typically ask you to sign a Buyer’s Agent Agreement. This contract guarantees that the agent will only represent your interests in a home buying negotiation and sale. It’s also how agents ensure they will be paid a commission when you finally purchase a home, though typically commissions are paid by the seller, not the buyer. Most Buyer’s Agent Agreements are exclusive and obligate you to work with the agent with whom you contract for a set period of time, usually between three and six months. If you buy a home using a different agent during the period of your contract, you may be liable to pay your contracted agent a commission even though they don’t wind up representing you in the purchase. So be sure you are confident in your agent before signing a Buyer’s Agent Agreement.
Let’s say you’ve finally found a place you want to call home. The first move is up to you, in the form of an Offer To Purchase or Purchase Agreement. This agreement, once signed, obligates both buyer and seller. Often the first offer to purchase you make is not the final one. A lot of negotiating may go on before you and the seller agree to the details of the purchase. A Purchase Agreement lays out the important terms of the home sale. It identifies specifically what’s being sold. For example, is the barn that sits on five acres across the road part of the agreement or not? It lays out the purchase price and any down payment you offer the seller (known as earnest money) and whether this money is refundable. It obligates you to a timeline by setting a closing date for the purchase.
Perhaps most importantly, a Purchase Agreement can protect you in the event that you are unable to get a mortgage to purchase your home. A well-written agreement will also protect you if a home inspection or the seller’s own disclosures reveal problems with the home that make it unacceptable to you at the agreed-upon price. Be sure any Purchase Agreement you sign is contingent upon financing, seller’s disclosures, and an uneventful home inspection.
On the date of your closing, the stack of papers you’re expected to read and sign can seem a mile high. Your mortgage lender is required by law to provide you with a closing disclosure three days before you close, and it’s important to read it carefully before you actually sign your mortgage agreement. It lays out the final details of your loan: loan term, interest rate, any points you decide to pay, your monthly payment, and more. Make sure you compare these final terms to be sure they comport with the loan estimate you were given before closing. If you find any discrepancies, address them with your lender. It’s also a good idea to review these documents with an attorney during this brief period before you actually close on your home.
The government has your back.
Throughout the home buying process, there are federal laws that ensure you are treated fairly and honestly by sellers, real estate agents, and mortgage lenders. The Fair Housing Act protects you from discrimination on the basis of race, gender, nationality, age, family status, disability, and religion. For example, you can’t be denied a loan or charged higher interest rates based on any of those factors. Homeowner’s insurance companies can’t charge you higher premiums. Any income you receive based on a disability must be accounted for in a lender’s decision to write you a mortgage.
The Truth in Lending Act requires mortgage lenders to provide you the information you need to accurately compare different mortgage deals while you are shopping for a loan. It also ensures you are provided the closing disclosure documents mentioned previously. It prohibits predatory lending practices including lending to buyers on the assumption that they will be unable to meet their obligations and subsequently fall victim to an unfair foreclosure. Another example of predatory lending is when a lender inserts language into a loan agreement that prohibits you from seeking arbitration during a dispute. The Truth in Lending Act also gives you three days from the date of closing to cancel any mortgage agreement you sign.
The Real Estate Settlement Procedures Act is the law that requires lenders to make “good faith” estimates of your loan costs before closing. It also prevents lenders and title insurance companies from giving kickbacks to real estate agents in exchange for referrals.
The federal government enforces laws around lender licensing to protect you from unscrupulous lending practices. Lending companies must provide training and perform rigorous screening of all employees. All employees must be licensed to do business with you, just like the lending company itself.
We get it. Learning the legalities of home buying isn’t as much fun as touring prospective properties or imagining how you’re going to make your new home a dream home once you move in. But it will protect you from potential pitfalls along the way. An attorney who is well-versed in real estate law can also help educate you as you start the search for your new home, provide sound advice throughout the home buying process, and prevent you from making expensive mistakes on your way to homeownership.
Check out our tips on how to buy or sell a house in Vermont.