* Disclaimer: the advice presented on this website and post is not legal advice and does not create an attorney-client relationship.
Tips for First-time Home Buyers: Before Closing (Part 1)
Buying your first home is an exciting yet stressful process. When you finally find the home you want to buy, you may think that the hard part is over; but in reality you’ve only completed the first stage in what is often a long and stressful process. The tidal wave of paperwork and deadlines can easily overwhelm first-time buyers. Knowing what to expect before you delve into the process can help you prepare and avoid common pitfalls. Many states differ with regard to the home-buying process, and tips/cautionary tales that are relevant in one state may not be relevant in another. In this two-part post, I’ll share some tips I learned in our first purchase in Illinois. I’ll try to note where other states may differ.
1. Be realistic about your budget.
In reality, you should have already calculated all monthly costs prior to making an offer; but that doesn’t always happen. Ideally, you should obtain a pre-approval before you start looking for a home. A pre-approval differs from a pre-qualification letter in that a pre-approval is much more thorough. However, with or without a pre-approval a good lender and realtor should help you calculate monthly expenses prior to making an offer.
If you failed to obtain a pre-approval prior to making an offer and/or you don’t feel you have a good grasp on what your monthly costs will be, make sure you calculate all expenses that will come with your purchase prior to your closing date. This will help ensure you know what’s headed your way and even give you an opportunity to reduce some costs where possible.
Most people calculate their monthly mortgage payment (which is the most obvious number), but here are some other common monthly costs that are easier to overlook:
Note: your homeowner’s insurance payments are often added to your monthly mortgage payment to be escrowed (placed in a separate account controlled by your lender or servicer) and later paid out by your lender or servicer. Talk to your lender and insurance agent if you have questions about this.
Note: like insurance (above), the total of your annual property tax is often divided into monthly payments and added to your monthly mortgage payment. If so, those funds will be escrowed and paid out by your lender or servicer on your loan. Talk to your lender if you have questions about this.
– Assessments or homeowner association (HOA) fees.
– Private Mortgage Insurance (PMI)
Note: PMI will not factor into everyone’s loan. A PMI may be applied in loans where the down payment is less than 20% of the purchase price. Talk to your lender if you have questions about PMI and whether it will apply to your loan, and if so, what the additional monthly cost will be.
Money saving tip: If you plan on having a security system, many insurance companies will discount your premium. Talk to your insurance agent about this and other money-saving incentives.
2. Be sure to get a good attorney (if your state uses them for closings).
Now, I admit- I’m a bit biased on this one. Many will tell you that closings are very cut-and-dry legal work and for the most part that is true. That being said, having an inexperienced or inattentive attorney can cause you a lot of problems, especially in those few cases where a closing turned out not to be so cut-and-dry.
While I don’t advise non-attorneys to challenge an attorney’s opinion on the law, I do tell people that it is important to have an attorney you feel comfortable with. If you are still early in the process and feel your attorney isn’t responsive to your concerns, or doesn’t provide you with adequate rationale/explanation for their stance, then terminate representation and find one you feel more at ease with. It may cost you a bit more money, but it’s far better than finding yourself in a botched negotiation.
How can you ensure you have an adequate attorney? Check your state Attorney Registration and Disciplinary Commission equivalent (it’s the IARDC in Illinois, but other states may use slightly different terminology for the disciplinary board) and conduct an attorney search; check sites like Avvo and Yelp for reviews from clients and colleagues; ask attorneys you may know for recommendations; or if you have a knowledgeable realtor/agency, ask them for a recommendation. However, as noted above, not all states use attorneys for closing. States like California have realtors handle all negotiation, and the title companies handle the rest of the closing documents.
One last piece of advice (regardless of whether your state uses attorneys or not): READ EVERYTHING. This is a habit even non-attorneys should be in. Yes, your attorney, lender, and/or realtor should help explain common terms involved in your documents, but the best way to ensure you don’t get caught off-guard by a document you signed is to read it before signing.
3. Get a good inspector.
Enlist the services of a thorough and fair inspector to inspect the property you intend to purchase. Check on sites like Yelp, Angie’s List, etc., or get a recommendation from friends, family, or your realtor. If you do choose to get a recommendation from your realtor, don’t be surprised if your realtor gives you multiple options, leaving the final determination solely in your control. While some realtors will just give you their best recommendation, others prefer to protect themselves by simply helping you to narrow in on options.
After you find an inspector and he/she completes the inspection, most inspectors will walk through their concerns with you. Soon after, they should also provide you with an inspector’s report. Be sure to go over this report with your realtor and attorney so they can help you understand what are common issues, and what are more serious things your realtor/attorney may advise negotiating on with the sellers.
An additional note: in many states an inspector who misses something in an inspection that comes to light after closing may be held responsible to the home buyer. Talk to an attorney in your state if you want to know more.
4. Gather your documents for your lender early.
If you’re going to have a mortgage (and let’s face it, almost all of us will), your lender will require a lot of documentation in order to process your loan. Most lenders will be pretty clear with you about when they need all the paperwork in so they can get it to the underwriter. However, often people wait until the last minute to upload paperwork only to find they can’t locate certain documents. This will likely result in your realtor/attorney requesting an extension on the period you have to obtain approval (which is fairly standard). While most sellers won’t cancel a deal over this type of extension request, some may depending on the circumstances- so it’s best not to find yourself in this position if you can avoid it. Just save yourself the headache.
To save yourself panic and unnecessary hassle you can start gathering these standard documents your lender is likely to request before they even ask for them:
–Tax returns for the last two years
–W2’s for the last two years
– Bank statements for the last two months
–Pay stubs for the past 30 days
–Scan of your driver’s license
– If you are a permanent resident of the U.S., a scan of your green card
Your lender is sure to ask for much more information, but almost every lender requests these so you can be (practically) certain your lender will ask for them as well. Additionally, keep in mind even after you submit all requested documents to your lender, the underwriter may require additional documents during the underwriting process.
5. Don’t open any new lines of credit or make any large purchases during the pre-approval/approval process.
Many already know that underwriters carefully scrutinize all of your finances and sources of funds/transfers (especially after the Patriot Act was enacted). However, people often don’t consider how spending money can create a problem. Underwriters look at your debt-ratio when deciding whether or not to approve a loan. Save yourself a huge headache, and tons of extra paper work, and just don’t open any credit cards or make any big purchases during pre-approval/approval. The last thing you want is your new Nordstrom charge card or new furniture purchase to be the reason your closing was derailed.
6. Make sure to switch utilities into your name to avoid service being cut.
In my opinion, this is one of the easier things to forget during the pre-closing stages. It is quite simple and shouldn’t take much time, but for some reason is often overlooked. Failing to arrange a seamless shift in utility service can result in service being cut. If this happens, it may cost you more to reactivate services, and may also take a few days to get everything back up and running.
To avoid this, have whoever is in touch with the sellers/agent request that they keep utilities active until closing. Then call the electric/gas/water companies (at least a week in advance to be safe) and request that utilities be switched over to your name on the date you intend to close. If you already have an account with the relevant utility company, be sure to also tell them the date you need to terminate service at your prior residence.
7. Transfer all closing costs prior to closing
Ideally, either your attorney or your lender should make it clear that all remaining closing costs (what remains after seller credits are applied) need to be transferred and received prior to closing. However, often times your attorney, lender, or both may fail to make this clear or provide you with the necessary information.
Generally, closing costs must be transferred via wire or cashier’s check; personal checks are rarely (if ever) accepted. If you plan on wiring the money, be sure you have all the account information you need to make the transfer, and that you transfer a few days before closing as wires are not always processed as immediately as most people think. If you are going to be using a cashier’s check, be sure that your bank will be open when you intend to obtain it (especially if your closing is an early morning one and you plan on stopping at the bank immediately beforehand).
Finally, beware of scams! A realtor friend in California recently educated me on a new scam going around that market in which hackers hack into realtors’ e-mail accounts and send a wire transfer request link to clients. Because of scams like this new security measures are being put into place. Be sure to talk to your realtor and lender in detail about the transfer process so you can be assured you won’t fall victim to this scam or one like it.
8. Do a walk-through.
Most attorneys and realtors will recommend you do a walk-through of your new place just prior to closing. In fact, many realtors will go through the property with you. However, if neither your attorney nor realtor recommends doing so- do it anyway. You want to be sure that everything is in working condition. Check all appliances that are part of the sale, electricity, water, etc. Make sure all the terms of your agreement are met (or if you are in a strictly “as is” sale, ensure you know what “as is” really means when it comes to your property). If anything isn’t as it should be talk to your realtor or attorney about possible solutions.
Have you bought a home? If so, what are some of your pre-closing tips for first-time buyers? Stay tuned for Part 2 on post-closing advice.