Q: We are buying our first home, but we don't have any idea what we have to do before settlement. Can you assist us?
A: There are a number of steps you must take from the time you sign a contract to the time that settlement takes place. They include:
1. Signing the contract. This is perhaps the most important step in buying a home. Once you have signed on the dotted line and entered into a contract, it may be too late to back out - without incurring substantial penalties. Make sure this is the home you really want. Insist on various contingencies in the contract, including a housing inspection by a professional, and obtaining financing for the purchase.
2. Inspection. Your contract should have a contingency that the property will check out acceptable to a professional inspector. Three to five business days from the time you sign the contract should be more than adequate to make the necessary arrangements for this inspection. It is strongly recommended that you wear your oldest clothes, and join the inspector during the tour throughout the house. After all, if you intend to live in this house, you might as well know all about it. If you are satisfied with the inspection report, send the seller and the agent a letter removing the structural engineering inspection contingency.
3. Loan application. Now you are ready to apply for your loan.In fact, it is advisable to begin the loan process even before the contingency for inspection has been removed. Shop around. Don't commit yourself until you have called at least two commercial banks, two savings and loan associations, and two mortgage bankers.
Don't be afraid to ask questions. If the lending institution wants your business, it should be helpful to you. Under the Real Estate Settlement Procedures Act (RESPA) there is a booklet which you will receive when you make your loan application. Read this carefully, and if there is anything you do not understand, ask your broker, your lender, or your attorney. This is the biggest investment of your life and you should have a complete understanding of the process.
4. Arranging for settlement. Now that you have a loan commitment, you must make the necessary arrangements for closing. In California and other parts of the country, this process is called an "escrow," but in the Washington area, lawyers and title companies perform settlements.
The buyer has the absolute right to choose the provider of settlement services, if the buyer is paying the settlement costs. Shop around. You will be amazed at the wide variety in prices for settlements.
A few years ago, the Supreme Court ruled that settlement services were not limited to particular jurisdictions, but indeed were a part of the commerce of the country. What this really means is that you need not settle in the state or county where the property is located. You have the right to go to any reputable attorney or title company of your choice.
5. Insurance. You will be required to obtain a homeowners insurance policy, for at least the amount of the loan. Here are three suggestions for determining which insurance company to use.
First, compare prices and coverage. Don't automatically take the insurance (known as hazard insurance) from your mortgage lender. Second, make sure that the policy is at least 80 percent of the market value of your property. Otherwise, you will have much less actual coverage than you need. Finally, obtain an insurance policy that has an automatic escalator clause. Property values are rising quickly in this area, and your insurance should keep up with this trend.
6. Pre-settlement inspection. Before you go to settlement, walk through the house to determine that it is in substantially the same condition as it was when you signed the contract. Check the plumbing, heating and air conditioning systems - to make sure they work.
7. Settlements. This is the beginning and the end of your home purchasing process. Be carefully prepared in advance, and contract the title attorney or title company to obtain a ballpark figure of the amount of money you will need at settlement. Also, if there are problems in the house, try to resolve them at settlement. Otherwise it may be too late.
Benny L. Kass is a Washington attorney. Write him in care of the real estate section, The Washington Post, 1150 15th St., NW, Washington 20071.