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Step 5 Inspections and Insurance |
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Home Inspections |
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Make your offer to purchase a house subject to the completion, review, and approval of the inspection reports. Doing so gives you the opportunity to either negotiate a credit or price reduction for corrective work that is discovered during the inspections or, if you wish, get out of the deal.
Homebuyers usually arrange for an inspection after signing a contract or purchase agreement with the seller. The results may be available immediately or within a few days. The home inspector will review his or her findings with you and alert you to any costly or potentially hazardous conditions. In some cases, you may be advised not to purchase the home unless these problems are remedied.
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What's involved in a home inspection? |
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A Home Inspection is a very important part of the home buying process. While a home inspection doesn't guarantee that everything will remain in good working order or serve as a home warranty, it will help to inform you whether or not everything is in good working condition at the time of the inspection.
During these examinations, an inspector comes to the property to determine if there are material physical defects and whether expensive repairs and replacements are likely to be required in the next few years. Home inspections generally provide buyers with information about the property's major systems including, although not limited to, heating, air conditioning, plumbing and electrical systems, foundation and structure, roof and flashing and possible environmental conditions affecting the property.
Such inspections for a single-family home often require two or three hours, and buyers should attend. This is an opportunity to examine the property's mechanics and structure, ask questions and learn far more about the property than is possible with an informal walk-through. Expect to receive a written report from the home inspector.
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Corrective Work |
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We strongly recommend that you and the sellers' agent be present, if possible, during property inspections, so that you both actually see the damage. Give the sellers copies of the reports for them to review before you meet with them to negotiate a corrective work credit. This is the moment of truth in most home sales. Sellers usually don't want to pay for the corrective work. Neither do you. The deal will fall through if this impasse can't be resolved.
The sellers may refuse to pay for repairs found by inspectors that you have hired. The sellers may question the impartiality or validity of your inspection reports and order their own inspections to verify or refute yours.
Sellers who try to punish the messenger are usually making a big mistake. If they drive you away, they may still have a legal obligation to tell other buyers what you've discovered. That disclosure will probably lower the price that any future buyer will pay for their house.
Lenders also participate in corrective work problems. They get copies of inspection reports when borrowers tell them that a serious repair problem exists, when their appraisal indicates a property obviously needs major repairs, or when the purchase contract contains a credit for extensive repairs.
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Why Properties Should be Inspected |
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Suppose that you spend $250 to have the home you want to buy completely inspected by a qualified inspector, and you find out that nothing is wrong with it. Now you can sleep soundly, knowing that your home doesn't need any corrective work. If you skip the inspection to save $250 and later discover that your house needs $25,000 worth of repairs, you'll end up spending $100 in repairs for every dollar that you "saved."
A home's physical condition greatly affects its value. You'd feel horrible if you paid top dollar for a home that you thought was in tip-top shape and then discovered after you bought it that the house was riddled with expensive defects. And yet, unless you're a professional property inspector, you probably won't have the faintest idea how much corrective work a house needs simply by looking at it.
Here Are Five Reasons Why A Home Inspection Is A Smart Investment
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Be confident you won't get surprised by major defects you hadn't bargained for |
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Be informed about the condition of the property you are buying |
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Learn how systems and fixtures work and how they should be maintained |
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Receive an expert's advice about the feasibility of making upgrades and renovations |
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Understand the construction and function of mechanical systems and safety feature. |
Paying for a qualified home inspection before you buy a home isn't just spending "a little extra" for peace of mind; its absolutely essential for anyone who doesn't want to spend thousands of dollars for repairs.
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Title Insurance |
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Title insurance protects you and/or your lender from unanticipated claims of an ownership interest in your property. New title insurance policies typically are sold as a package that wraps a lender's policy with a homeowner's policy.
Title insurance assures homeowners and mortgage lenders that a property has a marketable (valid) title. If, for example, someone makes a claim that threatens your ownership of the home, the title insurance company protects you and the lender against loss or damage, according to the terms and provisions of your respective title insurance policies.
Most of your title insurance premium, which is based on the sale price of the home, is spent on research to determine who legally owns the property that you want to buy and to find out whether there are any unpaid liens or judgments recorded against it. Because title companies do a good job of eliminating title risks before folks buy property, only about 10 percent of the premium goes toward indemnifying homeowners against title claims after the closing. You pay this premium only once at closing to insure yourself as the owner for as long as you own the property.
If you refinance your mortgage, your new lender will require a title insurance policy for themselves insuring that their mortgage lien is in first place on the property. The premium due at the refinance closing will be based on the new loan amount and will protect the lender from title risks (such as income tax liens or property tax liens, for example) that may have been recorded against your property between the time your previous policy was issued and the date of the refinance.
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Title Risks |
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All sorts of irregularities in the history of the various people who have owned the property since it was originally constructed can affect a property's title. Learn about some causes of these hidden risks to titles:
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Secret spouses: Sometimes a present or former spouse no one knew about will show up out of the blue and file a claim against the property. This explains why title-company representatives are so curious about your marital status. They must know whether you're single, married, divorced, or widowed in order to keep ownership records accurate. |
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Undisclosed heirs: When property owners die without wills, probate courts must decide whom their rightful heirs are. Court decisions may not be binding on heirs who weren't notified of the proceeding. Even when there's a will, probate courts must sometimes settle questions concerning the will's interpretation. Undisclosed or missing heirs |
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Questionable competency: Minors and people adjudged to be mentally incompetent can't enter into binding contracts unless the transaction is handled by their court-appointed guardians or conservators. |
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Human errors: This category covers everything from clerks who overlook liens recorded against property and other important documents while doing title searches, to surveyors who incorrectly establish property boundaries. |
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Forgery and fraud: Sellers are sometimes fraudulently impersonated. By the same token, signatures can be forged on documents. Forged deeds, releases, or other documents |
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Name confusion: A lot of title problems are caused by people who have names similar (or identical) to the buyer's name or seller's name. If you have a fairly common last name, you'll probably have to fill out a Statement of Information to help the title company distinguish you from other people with names like yours. If you have an ordinary name like Brown, Chen, Garcia, Gonzalez, Johnson, Jones, Lee, Miller, Nguyen, Williams or Smith, expect to be asked to complete a Statement of Information. What type of information is requested in a Statement of Information? You (and your spouse if you're married) will have to provide your full name, Social Security number, date and year of birth, birthplace, date and place of marriage (if applicable), residence and employment information, previous marriages, and the like. This information will be used to differentiate others with names similar to yours. |
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Types of Policies |
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There are two forms of title insurance, the lender's policy and the homeowner's policy. The lender's policy protects the mortgage holder against a fault in title that could result in a loss. A homeowner's policy protects the homebuyer against a loss that may occur from a fault in ownership or interest in the property.
There are two types of title insurance polices, the owner's policy and the lender's policy. When you buy your home you will arrange to buy title insurance, which will cover your interest in that property. The limit of this owner's policy will generally be for the market value of the house at the time of the purchase. If you will be obtaining a mortgage on the property, your lender will require a lender's policy to protect their interest in the property. The lender's policy will be written for the amount of the mortgage. You may be wondering why two policies are necessary to insure the same piece of property or you may be wondering if you have to pay two separate title insurance premiums. In most cases, you will pay for the two policies together and this cost will be a discounted price.
Owners Policy
The owner's policy will cover losses or damages you suffer if it is found that the property belongs to someone else, or if there is a defect or lien on the title, if the title is unmarketable, or if there is no access to the land. Your owner's policy will have a section setting forth what is covered as of the effective date. It will guarantee that your ownership is free from defects or encumbrances, except any listed as exceptions in the policy, it will guarantee your have access to the land, and it will guarantee that you have the legal right to sell the property and convey marketable title to a new owner. If you buy the property for $100,000, then the owner's policy will be written for the full amount, $100,000.00.
Lenders Policy
The lender's or mortgagee policy, on the other hand, protects the lender for the amount of their loan. If they loan you $80,000.00 on your house, then their policy will be for that amount only, $80,000.00. This type of policy is called the ALTA policy and is a standard policy approved by the American Land Title Association. It is issued to banks and other institutional lenders. In addition to covering the lender for the losses included in the owner's policy, the lender's policy includes coverage for any losses that the lender would incur if another creditor were first in line. If, for example, you were to take out a second mortgage and had managed to keep this second loan hidden while refinancing your first mortgage, the second mortgage would take first place in the event of a foreclosure action. The lender's title insurance policy would cover the mortgagee of the first loan if this were to occur.
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Exceptions To Coverage In Your Title Insurance Policy |
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Your title insurance policy will list certain exceptions that will be excluded from coverage. This is a standard practice, but you should be aware of which items are exempted and therefore not covered. Owner's policies usually contain a list of some of the following standard exceptions. These exceptions may include:
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Boundary line disputes: easements or claims of easements not show in the public records taxes or special assessments left off the public record claims of people who turn out to be living in the house (such as a prior owner's tenants) if their being there isn't a matter of public record |
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Unrecorded mechanic's liens |
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Mineral and/or water rights |
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Other exceptions, which are generally excluded from coverage, include zoning, environmental protection laws, matters arising after the effective date of the policy, and matters created, suffered, or assumed by the insured. Some other exceptions could be subdivision and building codes, and matters known to the insured, but not shown on the public records and not disclosed to the insurer. |
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Extended Coverage |
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You have the option of paying an additional fee to obtain "extended coverage" for any items you want included in your policy. Your title officer can tell you which endorsements are available.
Your lender will normally request certain endorsements added to their lender's title policy. These endorsements will often insure against defects found only by inspection of the property, or by a survey, unrecorded liens and easements, mining claims and water rights, and right of parties in possession of the property. Title policies covering a condominium property will also require special endorsements added to the policy.
Go over your title policy carefully to see what is included and which items are to be excluded from coverage. If you find items of concern, discuss these with your escrow agent or closing attorney. Any changes to the policy of title insurance should be made before the close of escrow. It is possible to remove exceptions by means of special endorsements, but the title company must be aware of any special requests as soon as possible. Keep in mind that title insurance gives you coverage only up to a certain point in time for all events, which took place during a previous point in time. A lien that is recorded after title insurance is issued will not be insured against a claim. Some areas provide for your title company to issue inflation coverage. This is an optional coverage item, is relatively inexpensive and may be worth considering.
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Cost of Insurance |
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The costs of the owner's and the lender's policies will vary depending on the location. The costs may vary from state to state, or county to county, or even from one company to another. Before choosing your title company or closing agent, inquire as to the prices they charge for a title insurance policy. Ask for the lowest rate allowed by law, and keep shopping for a lower rate if your closing agent will not negotiate on their fees.
When an owner's and a lender's policy are issued at the same time, or concurrently, the premium is less expensive than if the two polices are issued separately. Since the title insurance company only has to search the records one time, and because a concurrent policy doesn't increase the risk that much, the concurrent policy premium will generally cost about one third less than two separate policies. If there were to be a loss, the title company would be liable to the owner for the amount of their equity, in this case, $20,000.00 and to the lender for their value of their mortgage, $80,000.00 for a total of $100,000.00. With $100,000 of coverage, the title insurer has covered both policies.
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Step 1 Deciding to buy a Home
Step 5 inspections and insurance