When it comes to down payments, pre-approvals, and offers to buy, you feel confident that you know your stuff. But are you equally as confident about what happens after your offer is accepted?
In our third Coffee House Talk session, our mortgage experts will be talking about the final part of the home buying journey. Listen to Paul and Ben introduce the topics they’ll be covering such as home inspections, working with a title company, and private mortgage insurance:
Home Inspections: What To Expect
Some homebuyers make the risky choice to skip the inspection on a potential new home as a way to save costs. However, when major repairs are needed just a few months down the road, they end up spending way more than they saved from bypassing an inspection.
A home inspection will identify any major home issues before you close on your new home. As a buyer, you can include the inspection as a contingency in your offer. This way, if any problems are found, you can walk away from the offer without penalty.
During a home inspection, the inspector will examine exterior and interior areas of the home, including:
- Other interior elements
Inspectors cannot go inside walls, inside pipes, inside chimneys, or behind electrical panels. They do not specifically check for termite damage, mold, asbestos, or engineering is-sues. However, they may be able to give you a heads up if they see signs or suspect issues.
The average cost of a home inspection is $250-$500 depending on the size of the home, the age of the home, and where you live. A typical home inspection can last 2-5 hours, and you should be present for a first-hand understanding of what the inspector finds. A home inspector is not responsible for giving cost estimates for repairs or handling any repairs.
If your inspection report shows major issues, you can choose to:
- Walk away from the purchase.
- Ask the seller to fix the identified issues.
- Ask the seller to reduce the purchase price or give a cash credit so you can fix the issues yourself.
What Does a Title Company Do?
When your offer on a new home is accepted and you begin getting everything in order for closing, you’ll start to hear people mention the “title company.” If you’re unfamiliar with what a title company does, here is a breakdown.
A title company is a third-party team that manages the buyer, seller, lender, and insurance company through the closing process. Their role is to ensure that the real estate transaction is legal and hassle-free. Their three main responsibilities include:
- Title search — A title company will look into the history of the property to deter-mine who has bought and sold the property in the past. They also check to see if there are any secondary mortgages, liens, unpaid taxes, or legal issues on the property. Lenders will not issue a mortgage without a title search.
- Title insurance — Even after a clean title search, issues may arise. For example, if the current seller is (or a past seller was) not the legal owner and has no right to sell the property, there may be legal concerns. Title insurance, established by the title company, protects the homebuyer if issues come up.
- Closing and escrow — A title company also serves as the escrow officer prior to closing. They hold all necessary down payment and closing cost funds and properly distribute them at closing. They will also oversee the formal closing process and ensure all paperwork is signed, notarized, and distributed.
Typically, the buyer’s realtor will choose a title company on behalf of their client, but the buyer has the final say. Title company fees are paid by the buyer as part of their closing costs.
Will I Need to Pay Mortgage Insurance?
In the past, a 20% down payment was standard when purchasing a new home. Today, there are many finance options available to homebuyers that allow a smaller down payment. However, when a homebuyer pays less than a 20% down payment on a new home, they are required to pay private mortgage insurance (PMI).
Mortgage insurance lowers the risk to the mortgage lender if the buyer defaults on their loan. But as a benefit to a buyer, mortgage insurance makes it possible for them to overcome the obstacle of a large upfront down payment and still purchase a home.
On a conventional loan, your PMI rate will be determined by the size of your down payment and your credit score. Mortgage insurance costs will be included in your monthly mortgage payment. PMI is also required on all FHA loans. Almost all FHA loans are charged the same insurance rate, but there is a slight increase if your down payment is less than 5%. With an FHA loan, you will need to pay some costs at closing and the remainder as part of your monthly mortgage payments.
Canceling Your Mortgage Insurance
You are not expected to pay PMI throughout the entirety of your home loan. You are able to stop payment on your mortgage insurance in two ways:
- You can request cancellation on a conventional loan when the principal balance of your mortgage falls to 80% of your home value. You are not able to request PMI cancellation on an FHA loan.
- PMI will automatically cancel (with no action from you) on your conventional loan when the principal balance reaches 78% of your home value or you’ve reached the midpoint of your loan amortization schedule, even if you haven’t reached 78% of the home value.