Whenever I walk into our firm’s lobby to introduce myself to real estate clients who are there to close on a house, I tend to always greet them by stating “Are you ready to buy a house?!” I usually get one of three responses: a nervous chuckle followed by an “I guess so,” a very loud and relieved “Heck yeah, let’s do this!,” or a “Well, I guess I’m as ready as I’ll ever be, so let’s get this over with.”
As a real estate attorney and someone who has recently purchased a home, I am fully aware that buying a home can be one of the most stressful experiences in a person’s life. Not only are do you have to pack up your entire life and move it to another location, you have to navigate through the unfamiliar worlds of real estate and banking laws, all while waiting to find out if you are you going to actually be able to move into the new home that you have picked out. From my experience, the anxiety associated with buying a new home generally stems from the buyer not knowing what to expect.
There are 6 basic phases of buying a home: (1) finding the right house, (2) finding a lender, (3) making an offer, (4) Due Diligence, (5) title review, and (6) the closing. I have provided a brief description of what generally occurs during each of those phases, and provided some answers to the most commonly asked legal questions that tend to arise during the home-buying process. This is not intended to fully describe the entire process; rather, my goal is to simply provide a “road map” of the process so that new homebuyers will have somewhat of an idea of what to expect during each phase of the process. In later articles, I plan to delve deeper into each of these phases and give more in-depth information regarding the legal concepts that a homebuyer should know.
- Finding the Right House
This is, theoretically, the most straight-forward and fun part of buying a house. With so much information out there on how to find the perfect home, I would like to focus more on the legal concepts. However, there are two questions that come up during this phase of the process: (1) What are covenants and restrictions?; and (2) If I move into a community with a Homeowner’s Association (HOA), would I really have to pay the HOA dues?
Once you find a home and are considering submitting an offer to purchase the home, it is always smart to do a little bit of research to find out if your prospective community has any covenants and restrictions. Essentially, covenants and restrictions are rules that apply to all of the homes in a particular community. Such rules may include the minimum and maximum size of your home, whether certain exterior materials are either required or banned, or even whether or not additional buildings such as sheds or garages are permitted to be installed on the property.
In North Carolina, knowing whether or not the community in which you are planning to join has HOA dues is extremely important, because they also have an interest in your property and can foreclose on your property if you have not paid your dues.
- Finding a Lender
Finding the right lender can sometimes be a frustrating endeavor. Once you’ve found a lender, they are going to ask you all kinds of personal questions and are going to request that you send them all kinds of document such as pay stubs, bank statements, bills, etc. During this phase, buyers will often have questions such as: (1) Why does my marital status matter?, (2) What does my lender mean by stating that I can’t take on additional debt? and (3) What is mortgage insurance?
In North Carolina, spouses have an automatic interest each other’s property. As such, the lender has to know who has an interest in the property, and both spouses are generally going to be put on the deed to the real property. However, your attorney may have additional options that can explore for spouses who wish to buy property without the other spouse having an interest in it
When your lender tells you that you can’t take on additional debt, they are serious! This includes not going out and getting a new credit card to purchase a refrigerator, or even putting additional debt on your existing credit cards. By taking on additional debt, you would be affecting your debt-to-credit ratio, which could impact the programs and interest rates that you qualified for with your lender.
Essentially, mortgage insurance is what you buy for your lender’s protection. If you make a down payment less than 20% of the value of the property, your lender will require some form of mortgage insurance. Once you have mortgage insurance, if you default on the loan, then your lender is protected. There are different rates, terms, and options for the amount of mortgage insurance based on what you qualify for.
- Making an Offer
Once you have found the property that you would like to purchase, it is then time to make an offer. In addition to the proposed purchase price, your offer will include certain requests such as whether you would like the seller to pay for any closing costs, how long you would like the Due Diligence Period to last, and how much money you are willing to put down for Due Diligence and Earnest Money. Your real estate agent will put your offer into a real estate purchase agreement, have you sign the agreement, and then send that agreement to the seller or the seller’s agent. If the seller accepts your offer, then they will sign and return the purchase agreement to you, which will then start the Due Diligence Period.
- Due Diligence (the Inspection Period)
In North Carolina, the Due Diligence period is a required “waiting period” that takes place once an offer has been accepted. The Due Diligence period is generally going to be 30 days and is intended to provide the buyer with enough time to perform home inspections, get a survey of the property, and review the seller the disclosures.
Due Diligence money is the non-refundable “deposit” that you give directly to the seller. The amount varies depending on what you contracted for in your offer. Earnest Money is the “good faith money” that you will generally send to your agent or your attorney to hold onto until the closing. If, during the due diligence period, you decide to walk away from the transaction, while you will not be able to get your due diligence money back, your earnest money will be returned to you. However, if you wait until after the due diligence period expires to terminate the contract, then you will lose both the Due Diligence and the Earnest Money. If you continue with the purchase of the property all the way through closing, then you will have both your Due Diligence Money and your Earnest Money credited back to you towards the purchase price of the property.
Once you have signed the contract, it is your job as the buyer to conduct the due diligence; however, this will generally be done through your real estate agent. If, as a result of any of the inspections or surveys, you find any issues, you will then send a due diligence request to the seller requesting that they fix any of the problem that you have identified. If they refuse, then you will have the option to either terminate the contract and get your Earnest Money back, or continue with the purchase.
- Title Review
This is the period that you don’t really get to see because it is taking place in the background by your attorney. Essentially, your attorney will research the history of the property for the last 30 years, figure out who the various owners of the property were for those thirty years, and determine whether there is anybody else who can claim an interest in the property. Once the attorney has examined the title, they will then submit this information to the title insurance company, who will issue a policy based on the information provided. All lenders require that the borrower purchase a “Lender’s Title Insurance Policy,” but the “Owner’s Title Insurance Policy” is always optional. However, most attorney’s offices require that their clients purchase the Owner’s Policy in order to better protect the buyer’s interests.
- The Closing Phase
Finally, the big day has arrived. Most people walk into the attorney’s office for their closing nervous but really excited. Then, when the attorney pulls out a huge stack of paperwork that the buyer will have to sign, most people get a little overwhelmed.
In all actuality, that “HUGE” stack of paperwork is not that big of a deal. I like to tell my clients that there are primarily 3 important documents to be on the lookout for: (1) the Closing Disclosure, (2) the Promissory Note, and (3) the Deed of Trust. The rest of the documents are usually fairly self-explanatory documents that the lender requires for you to sign, many of which you have already seen before and have likely already signed at least once.
The Closing Disclosure (CD) is a statement that provides all of the details of the transaction. Prior to closing, your lender has to send you a version of this document at least 72 hours before the scheduled closing, but the version you are asked to sign at closing is final. The first page of the CD is a brief snapshot of the loan and it provides the terms of the loan, the amount of your monthly payments (including your escrow account), the amount of the closing costs, and the amount of cash that you have to provide on the day of closing. The second page of the CD provides an itemized breakdown of the closing costs, as well as any credits that you are receiving from the seller or your lender. Finally, the third page provides a breakdown of the amount of money that you owe as a result of the purchase price of the property plus the closing costs, and provides the amount that you are being credited as a result of your loan, the due diligence credit, and the earnest money credit.
The second important document is really the “meat of the transaction.” This document, called the Promissory Note or just the “Note,” is essentially a promise from the borrower to repay the entire loan amount to the lender, and it lays out the terms of the loan. Additionally, the Note provides the date and amount of the first payment, as well as what will occur if the borrower fails to timely make his or her payments.
The final important document is the Deed of the Trust. The sole function of this document is to convey an interest in the borrower’s property that he or she is purchasing to the lender. Thereafter, if the borrower should default, then the lender already has an interest in the property, and may foreclose on that property.
If you need assistance with a closing, the real estate attorneys at Black, Slaughter & Black in both our Greensboro and our Charlotte offices are available to assist you.