Message From Harbor City’s Broker-In-Charge
Welcome to the Harbor City Homebuyer Learning Center.
At Harbor City, we try to avoid the “sales talk” and instead emphasize real estate knowledge and client service. This informal guide is intended to explain and de-mystify the process of buying a home. The Homebuyer Learning Center has been organized using a home purchase timeline.
Chris Cunniffe, Broker-in-Charge
FIND YOUR LENDER
1. Identify the Best Lender for Your Needs. Mortgage loans are available through numerous sources including banks, credit unions, mortgage brokers, and specialized national and regional mortgage companies. If you have an existing banking relationship, you should make an inquiry with them, as banks sometimes offer the best mortgage terms to customers that maintain checking and savings accounts with their institution. In addition, you should seek out referrals from your friends and family to identify some loan officers that have a good track record. Upon request, Harbor City can also provide you with a list of lenders that we have found to be reputable.
2. Get Pre-Qualified or Pre-Approved for a Mortgage Loan. A buyer will always be in a better bargaining position with a seller when armed with evidence of either pre-qualification or pre-approval for a mortgage loan. Thus, once you select your preferred lender, it is worth your time to fill out the lender’s paperwork to obtain pre-qualification or pre-approval. The difference between pre-qualification and pre-approval is outlined below:
- Pre-qualification. Upon examination of your personal financial statement and credit history, the loan officer will provide a non-binding estimate of the loan amount that you are qualified to borrow. Pre-qualification gives you a rough estimate of your borrowing power.
- Pre-approval. Upon examination of your personal financial statement and credit history, the loan officer will issue an approval letter for a specified loan amount. These pre-approval letters typically expire after 30 to 60 days. Pre-approval may cause sellers to view you as a more credible buyer. Pre-approval may also allow you to lock in an interest rate for a specified period of time.
3. Negotiate Your Loan Terms. The process of negotiating your loan terms can be complicated. In part, this is due to the wide variety of loan options that are now available on the market. The discussion topics below are intended to summarize some key terminology that you should be familiar with when negotiating your loan. If you have engaged Harbor City as your buyer’s agent, your Harbor City agent will be happy to assist you in reviewing the various loan options that may be available.
- Points. A “point” is a fee charged by the lender equal to one percent (1%) of the total loan amount. The amount of this fee can vary. For example, a lender may have a program that includes a fee equal to “two points” or two percent (2%) of the total loan amount. “Points” are sometimes also referred to as “loan discount” or “discount points”. In exchange for this fee, a lender will typically agree to make a loan for a lower interest rate. If you prefer a loan that does not include “points”, you typically agree to pay a higher interest rate. A lender may elect to market a loan program with “points” because they can then advertise a lower stated interest rate.
- Fixed Rate vs. Variable Rate. Many lenders provide you with the option to choose between: (a) a fixed rate loan; or (b) a loan that involves a variable rate at some point in time, such as a “5-Year ARM” (interest rate fixed for 5 years and then adjusts with market rates). A fixed rate loan is most appropriate when you anticipate living in a home for a very long period of time and you are not comfortable accepting the risk of a general rise in interest rates. A variable rate loan typically features a lower interest rate, since the borrower has agreed to assume some risk of fluctuations in interest rates. A variable rate loan is more appropriate for a buyer that desires the lowest possible interest rate and envisions moving to a different residence within the first 5 or 10 years of the home purchase.
- 30-Year Mortgage vs. 15-Year Mortgage. Most lenders will give you the option to spread your principal and interest payments over a period of 15 years or 30 years. In the case of a 15-year loan term, the borrower is electing to make larger monthly payments in return for getting the loan paid off sooner.
- Private Mortgage Insurance (PMI). Most lenders require a buyer to pay for the cost of PMI when the buyer’s down payment is less than 20% of the purchase price. PMI should be distinguished from “title insurance”, “mortgage life insurance” and “homeowner’s insurance”. PMI is best described high-risk loan default insurance, as the insurance provider is insuring the lender in the event you default on your loan payments. Loans to buyers with less than 20% equity are considered riskier as compared to loans made to homebuyers with more equity. If you can afford to do so, you should try to avoid the cost of PMI by making a down payment of 20% or more of the purchase price.
- Closing Costs and Closing Escrows. When interviewing prospective lenders, you should ask them to identity the closing costs and escrows associated with each loan program. For instance, almost all lenders require you to pay for the cost of an appraisal. Other closing cost items may be negotiable. For instance, the amount of “points” and “loan processing fees” may be lower with one lender compared to another. Some lenders may require that escrows for taxes and insurance be established at closing, while other lenders may waive this requirement.
FIND YOUR REALTOR
1. Should You Engage a Buyer’s Agent to Represent You? Your election to engage a buyer’s agent is a personal decision. The decision often turns upon a particular buyer’s personal experience, real estate education, market knowledge, access to information, and negotiating skills. At Harbor City, we believe our agents add value to prospective buyers because of the following:
- Education, Experience and Negotiation Skills. We understand the process from start to finish. Collectively, we have participated in hundreds of real estate closings in various roles. We are also experienced negotiators.
- Market Knowledge and Information Access. Because real estate is our business, we are constantly absorbing market information as part of our daily routine. As a member of the MLS system, we have access to a huge library of data regarding recently closed transactions and currently listed properties. We can assess when a seller is asking a reasonable price and when they are trying to push the envelope.
2. Will It Cost You Any Money to Hire a Buyer’s Agent?
- MLS Properties: Commissions Paid by Listing Agent at No Cost to Buyer. It is the customary practice in the Charleston market for the buyer’s agent to be paid a portion of the total commission that the seller has agreed to pay to the listing agent. Because Harbor City is a member of the MLS system, all agents that list property on the MLS system have agreed in advance to pay Harbor City a portion of the listing agent’s commission if we succeed in finding a buyer for their MLS listed property.
- What About “For Sale By Owner” Properties? Where a property is “For Sale by Owner”, there is no listing agent. We find that most “For Sale By Owner” sellers are willing to cooperate with a buyer’s agent, especially considering the fact that the total commission they pay to a buyer’s agent is often half the amount that they would pay had they listed the property on MLS with a listing agent. In our buyer agency agreements, our buyer clients agree that Harbor City will receive a commission of three percent (3%) to be paid by the seller at closing.
FIND YOUR NEW HOME
1. Distinguish Between Your Needs and Your Wants. The most important first step in your property search is to narrow your focus. From the start, you should make two lists:
- Needs List. This is a list of the characteristics that you must have in your home. Your list may include:
- Geographic area/neighborhoods (as broad as acceptable to you)
- Minimum number of bedrooms
- Minimum number of bathrooms
- Acceptable school districts
- Wants List. This is a separate list of the additional characteristics that you desire, but can possibly live without. This list could include:
- Specific neighborhood within your general geographic preference
- Ideal number of bedrooms
- Ideal school district
- Ideal amenities
- Preference for new construction
2. How Much Can You Afford? The maximum amount that you can afford is typically equal to the amount of your available down payment, plus the amount that you are able (and willing) to borrow from a mortgage lender. You may not want to purchase at a level equal to your maximum buying power, but it is useful to determine your maximum buying power before proceeding too far with your property search.
3. Free Consultation from Harbor City. At Harbor City, we offer a free consultation to interested homebuyers. All initial consultations are provided without “sales pressure” and without any obligation to engage Harbor City as your buyer’s agent.
NEGOTIATE YOUR PURCHASE CONTRACT
1. Common Contract Negotiation Issues. Contract negotiation is a critical part of the home buying process. The purchase contract outlines who, what, where, when, and how the purchase of your home will occur. In the residential market, the purchaser typically submits a contract to the seller as a written offer. The seller may accept the contract, reject the contract, or counter with respect to certain contract issues (most commonly, the purchase price). Below is a summary of key issues (aside from the purchase price) that are often negotiated in the purchase contract:
- Earnest Money Deposit. An offer will be more attractive to a seller if accompanied by a substantial earnest money deposit. A buyer needs to assess market conditions, the prospect of competing bids, and the overall desirability of the property in determining the deposit amount that will accompany their offer.
- Down payment. This concept should be distinguished from “earnest money”. The earnest money is the deposit made by the buyer when the buyer submits the contract. The down payment is the agreed upon amount of the buyer’s own cash that will be used to purchase the property (as distinguished from loan proceeds that will be used to purchase the property). A purchase with a large down payment is generally regarded as more likely to close. Thus, a seller is more likely to sign a contract with a prospective buyer who is willing and able to make a significant down payment.
- Closing Date. In most circumstances, a seller prefers a quick closing, such as a closing within 30 days or less of contract execution. Occasionally, however, a seller wants to get the property under contract with a buyer but delay the closing for a period of time. A buyer should not agree to a quick closing if they are not likely to be prepared to close within that time frame. See discussion below regarding “Financing Contingency” and “Sale of Existing Home Contingency”. Both are examples of situations where a buyer is unlikely to be prepared to agree to a quick closing.
- Seller Disclosure Form. South Carolina has adopted the “Residential Property Condition Disclosure Act”. Pursuant to this law, the South Carolina Real Estate Commission has published a standard disclosure form that all sellers are generally required (there are some statutory exceptions) to complete and provide to buyers. The buyer and seller may expressly agree to waive the disclosure form requirement. It has now become common practice for sellers to provide these forms and publish them with the property listing.
- Property Inspection and Repairs. The contract should contemplate that the purchaser will undertake an inspection of the house (typically through the use of a professional home inspector) and notify the seller of any necessary repairs within an established time period. A seller typically desires a short period for inspections to be completed, whereas a buyer typically prefers a longer period of time. In some circumstances, the seller may refuse to have any responsibility for making repairs. In other situations, the seller may agree to make repairs, subject to a pre-determined “cap” on the seller’s liability for such repairs. The purchase contract should also contemplate the preparation of a termite/moisture damage (CL-100) report, including which party shall pay for the cost of the report.
- Personal Property. Personal property is property that can be removed from the house. Generally, personal property is not included with the sale of the house unless specifically identified in the contract. The most commonly negotiated items of personal property are major appliances such as the refrigerator and washer/dryer machines. Purchasers often negotiate for window treatments to be included as part of a sale. Occasionally, certain furniture may be identified in the contract as well.
- Closing Costs. In South Carolina, it is customary (but not required) for the seller to agree to pay for: (a) the real estate transfer tax (sometimes referred to as “deed stamps”); (b) the legal cost of preparing the deed itself; and (c) all Realtor commissions. It is also not uncommon for a seller to agree to pay the cost of a termite inspection report. All other closing costs are typically (but not always) the responsibility of the buyer. All that having been said, the parties are free to negotiate responsibility for closing costs. With new construction, it is very common for the developer to agree to bear a number of different closing costs as part of their marketing strategy. For example, a residential developer may agree, as part of its marketing strategy, to pay the cost at closing of a home warranty in favor of the purchaser. The negotiation of closing costs is a good strategy for a buyer where, for psychological or other reasons, the seller is unlikely to agree to any negotiation of the purchase price itself.
2. What about Contract Contingencies? Do They Help or Hurt the Buyer? A buyer’s personal circumstances may necessitate the inclusion of certain contingencies within the purchase contract. A contingency identifies an event that is at least in part outside of the buyer’s complete control, and generally permits a cancellation of the contract in the event that the contingency is not satisfied. Buyers are more likely to succeed in negotiating contingencies during a soft real estate market where there are not many competing bidders. In contrast, during strong market conditions, a buyer runs the risk that the contingency may make the buyer’s offer appear less attractive. Thus, while a contingency may help the buyer work through an uncertain circumstance, the inclusion of a contingency may hurt the buyer’s chances of getting the seller to accept the buyer’s offer. Below is a description of a few common buyer contract contingencies:
- Financing Contingency. This refers to a contract clause that conditions the buyer’s obligation to close upon the approval of mortgage financing for the buyer.
- Sale of Existing Home Contingency. This refers to a contract clause that conditions the buyer’s obligation to close upon the sale of the buyer’s current residence within a certain period of time.
- Appraisal Contingency. This refers to a contract clause that conditions the buyer’s obligation to close upon the buyer obtaining an appraisal showing a value equal to or greater than the purchase price.
GET ORGANIZED FOR YOUR CLOSING
1. Finalize Your Mortgage Loan. In the weeks leading up to your scheduled closing, you should communicate with your loan officer to confirm that the appraisal will be completed on time, that they are in touch with your closing attorney, and that they are prepared to close the loan on the scheduled closing date.
2. Select Your Closing Attorney. In South Carolina, all real estate closings must be conducted under the supervision of a licensed attorney.
- Responsibilities of the Closing Attorney. The responsibilities of the purchaser’s attorney typically include: (a) ordering and reviewing a search of the title for the property; (b) coordinating with the purchaser’s selected lender; (c) coordinating the activities of other professionals that participate in the closing process such as realtors, property insurance agents, and surveyors; (d) preparing a settlement statement for the closing; (e) conducting the closing at their office; (f) submitting the appropriate closing documents for recording in the real estate records; and (g) disbursing funds to the parties and various vendors in accordance with the signed settlement statement.
- Finding a Closing Attorney. As with finding a lender, you should seek out the recommendations of your friends and family. You should also inquire about the approximate fees for their services. Keep in mind that you often “get what you pay for”, so you do not necessarily want to choose the least expensive closing attorney. Upon request, Harbor City can provide you with a list of closing attorneys that we have found to be reputable.
3. Order a Survey. A survey may or may not be required by your mortgage lender. A survey will identify any property line encroachments, violations of building setbacks, and other property defects that may need to be resolved before you proceed to closing.
4. Review Property Inspection Results. Your purchase contract may give you certain rights in the event that either the property inspection report or the termite inspection report reveals the need for certain repairs. You should review the results of these reports with your Realtor and your attorney to determine the appropriate course of action.
5. Line Up Homeowner’s Insurance Coverage. In addition to obtaining hazard and liability coverage for your own protection, you will need to satisfy your lender that they are also protected by insurance. You will need to advise your closing attorney of your preferred insurance agent so that arrangements can be made for evidence of insurance to be provided to your lender.
5. Utilities. In advance of closing, you will want to set up accounts and service start dates with all utility providers.
CLOSE YOUR DEAL
1. Schedule a Closing Date. You should communicate with your attorney to select a date that works for you, the seller, and your lender.
2. Schedule a “Walk Through”. Either on the day of closing or within a few days prior to the closing, you should schedule a “walk through”. A final walk-through is worth your time because it allows you to confirm that agreed upon repairs (if any) have been made, and that no further damage has occurred to the house. If repairs have not been made or there is new damage, the issue will need to be resolved prior to closing.
3. Study Your Settlement Statement. In advance of the closing, you should try to obtain a draft settlement statement (sometimes referred to as a “HUD” or a “HUD-1”, which refers to the fact that the settlement statement must comply with the federal Real Estate Settlement Procedures Act, which is regulated by the Department of Housing and Urban Development). You should study the settlement statement carefully with both your attorney and your Realtor. Below is an explanation of some common settlement statement items that are often charged to the purchaser at closing. Your purchase contract may allocate these costs in several different ways. Thus, the settlement statement should always be compared to the purchase contract. Please note that these are generic descriptions only and you should consult your closing attorney to confirm the specific purpose of all items listed on your particular settlement statement.
- Price and Earnest Money. Don’t forget to verify that the price shown on the settlement statement is consistent with your purchase contract. If you have previously deposited earnest money, make sure that you are given credit for having already paid that amount.
- Tax Prorations. The settlement statement should allocate annual property taxes in the manner called for by your purchase contract. Typically, the parties have agreed to pro-rate taxes as of the day of closing, with the purchaser being responsible for taxes associated with the portion of the year from and after the closing date.
- Loan and Loan Costs. The settlement statement will reflect the amount of your mortgage loan. It will also detail all costs you have agreed to pay in connection with your loan such as “points”, loan processing fees, and the cost of the home appraisal.
- Interim Interest. With most residential mortgage loans, the borrower is not required to make any regular loan payments until the first day of the second month following the closing. However, interest does accrue during this period and most lenders require that this interest be paid in advance, at closing.
- Hazard Insurance. Your lender may require that you pay your insurance company for a full year of property insurance in advance at the closing. If your lender will be administering the payment of insurance premiums, you may also need to make an initial escrow deposit with your lender for this purpose.
- Private Mortgage Insurance (PMI). If required for your loan, your lender typically administers the payment of this insurance. At closing, your lender may require you to make an initial escrow deposit with them for this purpose.
Tax Escrow. If your lender will be administering the payment of property taxes, then, at closing, you may need to make an initial escrow deposit with your lender for this purpose.
- Attorney Fees and Expenses. Your closing attorney is typically paid at closing. The settlement statement may also reflect reimbursement of certain expenses to your closing attorney (e.g. courier fees).
- Title Abstractor’s Fee. Your attorney may hire a third party (typically referred to as a title abstractor) to search the title for your property. The abstractor’s fee is typically paid on the settlement statement.
- Surveyor’s Fee. If not previous paid, the surveyor’s fee is typically paid at closing.
- Title Commitment Fee. Most title agents (in South Carolina, it is common for the purchaser’s attorney to also act as the title agent) charge a separate fee to compensate the title agent for their time and expense associated with preparing a title commitment.
- Title Insurance Premium. This is the insurance premium charged by the title insurance underwriter. In South Carolina, it is not uncommon for the closing attorney (either directly or through a separate title agency) to receive a portion of this premium as a commission. If this is the case, the attorney is require to disclose this to you in a written disclosure document.
- Recording Costs. These are the fees charged by the government recording office to record your deed and mortgage. These charges should be distinguished from transfer taxes (sometimes called “deed stamps”), which are more often the responsibility of the seller.
4. The Closing Table. The closing is typically held at the office of the purchaser’s attorney. After the documents have been signed, the closing attorney arranges for the documents to be recorded and for disbursements to be made to the various parties and vendors, all in accordance with the signed settlement statement.
5. Move On In! After the deed is recorded and closing disbursements are made, you become the legal owner of your new house