Whether you are buying or selling a property in Kansas or Missouri, the transaction process itself can be extremely complex. As a result, I’ve compiled 12 terms that commonly come up. If you have any other questions, don’t hesitate to ask me anything. We are a team!
Contingencies
These are conditions to be satisfied by a certain date to the satisfaction of the person requesting them. There are usually several contingencies to be met in a sale: two “biggies” are loan approval and physical inspections.
Escrow
This means two things:
1) a mutually agreed upon period of time for the Buyer and Seller to perform all of the detail work in the Sales Contract;
2) the Escrow company itself, which is a neutral third party in your transaction. The escrow company prepares paperwork, handles the title insurance, gets the loan documents signed, guarantees that reporting requirements for the state and county are met, receives and pays out money to the correct parties only after all the terms of the sales contract have been fully satisfied.
*Usually, a buyer and seller split the escrow cost.
Home Warranty Plan
This is a maintenance insurance plan for your home. The policy covers most of the problems that can go wrong with a home during the first year. IT IS VERY IMPORTANT TO UNDERSTAND THAT THEY DO NOT COVER EVERYTHING. READ THE POLICY. THEY MAY EXCLUDE THINGS THAT YOU THINK WOULD OR SHOULD BE COVERED.
If a covered problem occurs, the Buyer calls the warranty company and they send out a repair person. The Buyer pays a service call fee (usually around $60) and the company picks up the rest of the charges to repair the problem or replace the item. Realtors must offer these plans to buyers by law. We make no profit on them. A buyer must either accept one or waive it. The plans aren’t all they are cracked up to be, but they are better than not having any plan.
Termite Inspection
The home that you want to buy will likely be inspected by a licensed termite professional. This is part of the contract; check with your lender to learn if they will require it. The termite inspection will cover the sub area to the attic. The inspector will advise you of any problems with termites, dry rot, or cellulose debris (junk wood under the house that termites can eat), shower pan leakage, etc. Generally, the Seller will pay for any needed work to get a “clear” termite report, although this is negotiable. I always include detached garages and decks, etc. The Termite Report will outline recommended work and estimated costs.
Home Inspection
It is important to get the home inspected by a licensed contractor who does professional home inspections. Get a thorough inspection from the foundation to the chimney to the main line sewer, with a written report of any problems. The home inspection, about $ 375-500, is paid for by the buyer. (Additional inspectors, such as chimney inspectors or geological inspectors, cost extra.) It’s worth it, and can really educate you about your house and problems to watch for. Don’t even think of buying a house without one. The inspections usually take place as soon as the offer is accepted as there typically is a deadline to have one done.
Loan Info
Your loan is attached to the property through a trust deed. This is a legally recorded lien against the property. When I use the term lender, its a generic term meaning a bank, credit union, or a mortgage banker or broker. Its important that you shop for the best loan and I recommend contacting more than one lender. The lender you select should be somebody that you can “go live” with when you have questions — be very careful when using Mortgage Brokers through the Internet for this reason. Lenders continually come up with new loan “programs” which are new types of loans.
ARMs
ARMs (adjustable rate mortgages [loans]) are the easiest loans to qualify for. It is important to understand how these can adjust — and the rate can adjust monthly. These are tied to one of four government indexes, 6-month T-Bill, 1 Year Treasury Securities, 11th District Cost of Funds, and the LIBOR-the London loan index. The middle two are the most popular. The bank takes the index and adds on their margin, or profit. This is the interest rate you pay. The lower the margin the better. This will differ depending on what index you use. Don’t be distracted by the initial “teaser” interest rates — Compare the “fully adjusted” rates.
3, 5, 7, 10 or 15 Year Fixed
The interest rate is fixed, usually for 3, 5 or 7 years, then it adjusts just like an ARM for the rest of its 30-year loan life.
Fixed Loans have a fixed interest rate for 30 or 40 years.
These usually are not assumable by the next Buyer.
*Please have your lender explain to you exactly how your loan works. After all, you’re the one borrowing the money, aren’t you?
PMI
PMI is Private Mortgage Insurance. If you get a loan from the bank greater than 80% of property value or put less than 20% down, they require you to get PMI. This coverage protects the bank in case you default on the loan. PMI is payable until the loan-to-value lowers to 80%. Good news: PMI may be a tax-deductible expense.
Points & Loan Fees
Anytime you hear the word point, just think “percent.” 1 point means 1% of the loan amount. While discussing loan fees, you may hear “2 points plus $ 350″. This means that bank charges 2% of the loan amount and $ 350.
Misc. Loan Fees
Besides the points plus a few hundred dollars, lenders charge for a few other items. Appraisal, Credit Report, Tax Service, etc. are standard ones. You will receive an estimate of these costs from the lender once you have filled out your application. This is so there are no surprises just before closing. How much are these costs? Usually about 1% to 3% of your loan. You pay them at closing in one lump sum.
Short Sale
This is when the owner/seller owes more money on the property than it can be sold for. Many times (but by no means always), in situations like these, the bank will allow a “short sale” for a lower amount than what is actually owed on the loan. If you are a seller and want to sell your house through the short sale process, don’t wait; I’d be happy to refer you to colleagues with extensive knowledge in this field.
Title Insurance
Although this is negotiable, the buyer’s title insurance is usually paid by the Seller and the lenders title insurance is paid for by the buyer to insure proper ownership of the property. The title company will search each property to uncover liens of all types, easements, and any other problems that could plague a new buyer and “cloud” the title to the property. They make sure that the property taxes are paid, the old loans are paid off, and the liens are removed.