This article is the second part of a three-part series discussing the moving process. For part one, click here. For part three, click here.
Get in Touch with Your Lender
In addition to feeling secure in your new home and community, you need to be secure and confident about your finances. You can use the period while your home is being built to prepare financially for homeownership for the first time or for the transition from one home to another.
When your builder tells you that your home is almost complete, you should contact your lender so that the final loan papers can be drawn up. If you’re working with your builder’s preferred lender and title company, the builder will likely be in touch with them to schedule your settlement. If you’re choosing your own title company to handle the closing, you’ll need to coordinate the date with your lender and the builder’s representatives.
Be ready to respond quickly to your lender and to the title company representatives and attorneys if they contact you with requests for information or additional paperwork. Your lender will recheck your credit and verify your employment just before the closing. If you’ve made any unusual deposits over the past few months, essentially anything other than your paycheck, you’ll need to provide your lender with a paper trail to prove the origin of the money.
If you’re selling a home before you move into your newly built home, you’ll need to coordinate the settlements on each house so that the funds from the sale of your current home are in place and available before the settlement on your new home. Your real estate agent, lender, and settlement company can help you with this process.
What to Expect on Settlement Day
By the time you’re close to closing on your home, you should have made the decision about whether to use the title company preferred by your builder or a title company of your choosing to handle the closing. Your builder typically would prefer that you use a settlement company that they’ve worked with in the past because they know that this company understands the timeline of building a new home and can coordinate the settlement more easily than a company with less experience with new construction.
“The process of buying and closing on a newly built home is a little different from an existing home, primarily because you’re usually working from a contract provided by the builder,” says Todd Ewing of Federal Title & Escrow in Washington, D.C. “It’s a good idea to have a Realtor or a real estate attorney review the contract just to make sure your interests are represented. If you’re offered a credit toward closing costs for the use of the preferred lender and title company, it’s not necessarily a bad idea to use the company, but you should make sure you’re comfortable that the contract protects you.”
In addition to having your sales contract reviewed by an attorney, Ewing suggests paying a seasoned attorney to review the title search and title survey before your closing, and then actually having the settlement with the builder’s preferred company. Settlement day for a newly built home typically takes place at the new home community’s sales office, Ewing says.
Your lender, your builder, and your real estate agent should present materials including a sample HUD-1 Settlement Statement to you before the settlement so you know what to expect; the title company could also provide paperwork before the closing day so you’re better prepared. You can ask to see sample documents and request your real estate agent or a title company representative to point out the areas that require close scrutiny.
Your lender should have provided you with a Good Faith Estimate when you applied for the loan on your new home. The Good Faith Estimate includes information about the terms of your loan such as the interest rate and monthly payments, as well as an estimate of the closing costs you must pay. While some builders offer to pay closing costs as an incentive for buyers, in many cases you’ll need to pay closing costs yourself. These costs include legal fees, title searches, title insurance, taxes, recording fees, and document preparation fees. Your lender should go over the closing process with you when you apply for a loan, so be sure to ask questions at that time if you don’t understand something.
The Good Faith Estimate looks similar to the form you’ll see at your settlement, known as the HUD-1 form. You’re entitled to see that form twenty-four hours before your settlement so that you have time to read it and compare the listed fees to the Good Faith Estimate you received from your lender. If you have any concerns about this form you can contact your lender and your Realtor with questions.
You’ll be signing numerous documents at the settlement, but you should pay careful attention to the following:
- HUD-1 Settlement Statement.This document includes all of your charges and credits on the left side of the page and all of the seller’s (your builder) charges and credits on the right side of the page.
- Truth-in-Lending Statement.This document provides you with an estimate of the annual cost of your mortgage over the full term, including an amortization page that shows exactly how much you’ll pay in principal and interest during every month of your loan term, and an annual percentage rate (APR) that factors in all of the costs of your loan. Information should be provided here as well about late fees.
- Promissory Note.This note should include your loan amount, your loan term, and your interest rate. Signing this paper obligates you to repay the loan.
- Deed of Trust.This is the document that pledges your home to be used as collateral for your mortgage and allows your lender to foreclose on your home and sell it if you default on the loan.
An important aspect of the settlement is that your new home will be covered by title insurance. While most people never need to use the protection offered by title insurance, you should understand its function.
Understand Your Title Insurance
“There’s a misconception that a title search and title insurance don’t matter as much on a new home, but the reality is that new homes are often built on recently subdivided land with new easements and are built with lots of subcontractors, so in some ways a new home could be even riskier from a title insurance perspective,” Federal Title & Escrow’s Todd Ewing says. “Title insurance covers everything to do with the title such as making sure that there isn’t some long-ago mortgage on the land that was paid off but not properly released.”
Two types of title insurance are available on homes. The first type, known simply as title insurance, protects your lender up to the value of your loan. So, if you’ve made a down payment of 20 percent on a $300,000 purchase, the title insurance policy protects your lender’s investment up to $240,000. The title company will defend your ownership of the home and protect your lender against any financial loss caused by a “title defect.”
Before a title company provides title insurance, it will do a survey on the property to make sure that there aren’t disputes over who owns the land or any liens against the property. Sometimes title defects happen when a will hasn’t been properly probated or from simple human error when a deed for the land was improperly recorded at the county courthouse.
In addition to the title insurance your lender requires, you can also purchase owner’s title insurance or enhanced owner’s title insurance that directly protects you up to the value of the policy.
“I recommend that new homebuyers purchase enhanced owner’s title insurance because it covers any possible mechanic’s lien stemming from an unpaid bill, issues with improper permits, or even mistakes in the subdivision that aren’t covered under a standard title insurance policy,” Ewing says.
Taxes and Homeownership
In addition to the legalities of holding title to your new home, as a homeowner your tax situation will change — usually for the better. While you’ll be paying property taxes as part of your monthly mortgage payment, you’ll reap the benefits of tax deductions on your state and federal income tax returns.
“When your builder pulls the permit to begin construction on your home, the county will establish your property tax assessment based on the size and location of your home and the type of property,” says Anis Blemur, a registered tax professional in Miami, Florida. “Property taxes are paid ahead of time rather than retroactively, so if you move into your new home in June, you’ll need to pay property taxes for the remainder of the year.”
Most lenders require you to set up an escrow account for your property taxes. You’ll pay a portion of your taxes into that escrow account each month and then your mortgage lender will pay the property tax bills when they arrive.
The more exciting part of taxes and homeownership is the ability to increase your income tax deductions.
“The first time you file income taxes after you become a homeowner, you should fill out Schedule A on your federal income taxes to itemize your deductions,” Blemur says. “You can deduct your property taxes, your mortgage interest for the year, and, if you paid points on your loan when you bought it, you can deduct those, too.”
If you made a down payment of less than 20 percent on your home and took out a conventional loan or if you’re financing your purchase with an FHA loan, you may be able to deduct your mortgage insurance payments depending on your income. This tax deduction has been phased in and out of federal law, so be sure to check with the IRS about current rules.
“In some counties and cities there are tax credits available to first-time homebuyers,” Blemur says. “You should ask your lender or a tax expert, or check with the local government website, to see if you qualify for any special credits.”
For more expert advice on buying and building a home, check out the free eBook download of New Home 101: Your Guide to Buying and Building a New Home at NewHomeSource.com.