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Buying a Home

This document tells you the following:

• What kind of property should you buy?
• How do you look for a house?
• What are the steps you must go through before you buy a house?
• What are the usual terms you find in a real estate contract?
• How do you pay for your new house?
• How do you check the title for the property you are buying?
• What happens if you can't repay the loan?

WHAT TO BUY?

Homer and Helen have been married for about five years. They have rented several apartments. They would like a home of their own.

What kind of property should they buy? For Homer and Helen, a big factor is cost. They have saved about $6,500 for a down

payment. They know that banks are unlikely to give a home loan for more than two and a half to three times the purchaser's annual salary. Their combined income is $41,000 a year.

Homer and Helen have dreamed of a house with a yard, but they wonder if they could better afford a mobile home or a condominium. They do not know very much about condominium ownership.

A condominium (or "condo") is an individually owned dwelling unit in a complex of such units. Each condo owner owns a share of the common property of the complex. Common property might be a laundry, swimming pool, or landscaped grounds. The condo owner pays a monthly maintenance fee to care for this property.

Georgia law requires that two documents be prepared for each condo development. One document is the bylaws of the owners' association. This document is needed for various reasons, including the fact that there are multiple owners in one complex, all of whom have rights and responsibilities associated with the common property. The other document is the master deed. Both should be read carefully so that purchasers know what to expect. Otherwise, a new condo owner might be surprised to learn that there are certain regulations regarding property use, such as that owners cannot keep pets or play loud music late at night.

Homer and Helen also look into buying a mobile home. When they have finished their investigations, they discuss what they should do. Should they buy now or continue to rent? What are the advantages and disadvantages of the different kinds of homes?
Homer and Helen decide they really want a house with a yard. Helen wants to garden, and Homer would like to have a dog. They decide to try to find a house they can afford.

To Buy or Not to Buy?

	Cost	Investment Value	Maintenance Cost	Time Cost	Control over use of property	Privacy	Ease of Relocating and Resale	Other factors
Private House	highest	probably the greatest	a lot	a lot	greatest; limited by government and neighborhood regulations	greatest	could be difficult
Condo	medium	good	some; could increase	very little	some; limited by condo association rules	varies	could be difficult	may have recreational facilities
Mobile Home	low	poor because of depreciation	some	some	some; limited by local government regulations and mobile home park rules	varies	desired location could be difficult; resale would vary	vulnerable to winds
Rental	low to medium	none (except that because there is no downpayment the money could be invested elsewhere)	very little	very little	least	varies	easiest to relocate	may have recreational facilities

Looking for a House

Selecting a home typically involves a real estate broker or agent. The broker brings the purchaser and seller together to negotiate the sale. Generally, the real estate broker is paid by the seller through a brokerage commission. In Georgia, this commission typically equals 6 to 7 percent of the total purchase price of the home.

A local real estate agent helps Homer and Helen look for houses. Finally, they find a house they like at a price they can afford. It is a small, white frame house with three bedrooms and one and a half bathrooms. There are large oak trees in the yard. The house is in a neighborhood convenient to their jobs. All of the houses in the neighborhood look well cared for.

There are several steps the couple must follow to get the house:

1.  Inspecting the Property

A friend advises them that before making an offer for the house, they should

• inspect it very carefully, inside and out.
• look for signs of breaks and leaks, wear and tear.
• have it inspected for termites.
• ask the age of the roof and the heating system.
• be certain of the boundaries.
• find out about easements and zoning regulations.
• find out if things that are not fixtures (such as a refrigerator or porch swing) go with the house.

As a result of the inspection, Homer and Helen discover that some of the plumbing is in need of repair. The seller agrees to have the repairs done.

2.  Signing the Purchase Contract

Homer and Helen make an offer for the house, which the seller accepts. The realtor prepares a contract for the transaction.
A written contract for buying real property is required by law. The contract makes the sale enforceable should there be a legal dispute. The contract should include all the terms of the sale.

Usual terms of a contract include:

• description of the property, including all fixtures to be retained by the seller.
• official location of the property.
• purchase price.
• sale costs for buyer and seller.
• commission for real estate agent.
• actions seller must make (such as repairs).
• amount and conditions for earnest money.

3.  Depositing Earnest Money

Earnest money essentially is a good faith deposit paid to the seller upon the signing of the contract. It is applied toward the total purchase price when the sale is closed. What if the actual sale does not occur for reasons that are not the fault of either the purchaser or the seller? Usually the earnest money is then refunded to the purchaser. It is important that there be a contract clause that makes earnest money refundable. If the contract is breached (or broken) by the purchaser, he or she usually forfeits the earnest money. The seller keeps it as payment of any damages caused by the purchaser's breach.

4.  Obtaining Funding

Like most people, Homer and Helen do not have enough money to pay the entire price of a home. They must therefore shop for a loan.

Loans for homes are called mortgage loans. They are one kind of credit. Mortgage loans are secured loans. The property (that is, the house and the land it is built on) becomes the collateral needed to secure the loan.

As a general rule, a mortgage loan is taken out for a long period of time, typically 15 to 30 years. The homeowner borrows a specific amount of money for this time period. The amount borrowed is known as the principal. The period of years for which the loan is made is known as the term of the loan. The principal is paid back over the term of the loan at a particular rate of interest. The length of the term influences the amount of monthly payments. Homer and Helen know that these payments shouldn't be more than 20 to 25 percent of their income.

Through most of the years of payment, a high percentage of the monthly payment goes to pay the interest rather than the principal amount of the loan. Suppose Homer and Helen obtain a 30-year loan of $75,000 on the house at 8 percent. Of the first monthly payment of $550.32, $500.00 would be interest. Truth in Lending laws require that borrowers be informed of these figures prior to taking the loan.

In the past, most mortgage loans were at fixed interest rates; that is, the monthly payments were the same over the term of the loan. Recent years have been less stable economically. Lenders have found this kind of mortgage lending unprofitable. They have created new types of mortgages with adjustable and variable interest rates. This variety of mortgages makes home loan shopping more complex.

Most home loans come from banks and savings and loan associations.

Several federal government aid programs assist buyers in getting loans. The Federal Housing Administration (FHA) and Veterans Administration (VA) both insure home loans. This insurance encourages banks to lend to people whose loans they might not otherwise approve. FHA and VA loans allow lower down payments and usually have lower interest rates. VA loans are only available to veterans of the armed forces.

The Georgia Residential Finance Authority offers low-interest mortgage loans for eligible low and moderate-income borrowers. However, there are geographical as well as income restrictions. In addition, persons convicted of certain illegal drug activities are not eligible to participate in the program.

5.  Checking the Title

Besides trying to arrange for financing the house by obtaining a mortgage loan, Homer and Helen hire an attorney to examine the title of the property they are buying. A title is one's right to ownership of a particular piece of real property. The title examination (or search) is critical for the homebuyer. It is important to know that the seller is the sole and rightful owner of the property and that there are no problems with the title.

A title search involves tracing the chain of ownership of the property. In Georgia, the search covers 50 years. The searcher looks to see that no one else besides the seller has any claim or right to the property.

The searcher also looks to see that there are no defects in the seller's title. A defect in the title might be taxes owed on the property. Another defect might be the right of other people to use part of the property as a driveway. In other words, a title defect concerns anything that might interfere with the purchaser's use and enjoyment of the property.

6.  Closing the Sale

Homer and Helen have arranged a loan with a local lending company, and the title search shows that the seller has a clear title to the property. It is time for the closing, or settlement of the sale.

Federal law requires that the buyers be notified of the closing costs at least 24 hours before the closing. These costs may include fees for the loan application, property appraisal, title search, attorney's fees, and title insurance. (Title insurance protects a buyer against any claim overlooked in the search.)

Generally, the buyer must be prepared to pay these fees and the agreed-upon down payment on the house. The lender pays the remainder of the cost of the house. The seller will pay the real estate agent's fee and title transfer. At the closing, the documents are signed that complete the sale.

7.  Recording the Documents

The document that represents the passing of ownership from the seller to the purchaser is the deed. The deed states that for a particular sum of money, the seller grants (or conveys) to the purchaser the property described. Once the deed is signed by the seller and handed to the purchaser, the purchaser becomes the owner of the property.

When the purchaser finances the property with a mortgage, another document is required. This document is known in Georgia as a deed to secure debt. This deed establishes the new buyer's property as collateral for the loan. The deed to secure debt is executed (or signed) by the purchaser and given to the lender.

After the sale is closed, the signed documents must be recorded at the local courthouse. By recording each real property sale, land records can be safely and centrally maintained.
Now, at last, Homer and Helen own their home.

If You Can't Repay the Loan

If a mortgage loan is not repaid as agreed, the mortgage lender may obtain the collateral and sell it to satisfy the debt. This process is known as foreclosure.

Suppose Bill buys a house. Several years later, he loses his job. His wife's salary is low. They miss several payments on their house. Shortly thereafter, Bill receives a notice from the bank stating that an ad will be placed in the county newspaper announcing that the house is to be sold at foreclosure. The sale will occur on the courthouse steps on the first Tuesday of the month.

As in other legal processes, notification is very important. It gives Bill time to try to get some money to make the payments or satisfy the bank. It gives him time to find out if he has any grounds for legal action to prevent foreclosure.

If Bill does nothing, the house may be sold at public outcry (that is, at a public sale). A person buying the house would pay an amount equal to the unpaid principal on Bill's loan, plus interest and debt collection costs. In this scenario, Bill and his family would lose their home and the money invested in it.

Note that property can also be seized and sold at public sale by a county government to meet unpaid property tax debts. Delinquent taxpayers (that is, those who fail to pay the tax assessed on their house) must also be notified before the sale.

Once you decide to buy a home, it is important to be aware of the legal steps and the financial demands of purchasing it. A lack of knowledge can result in financial loss and hardship.

* Excerpted from An Introduction to Law in Georgia, Fourth Edition, published by the Carl Vinson Institute of Government, 1998 (updated 2004).  The Vinson Institute is not responsible for errors in the online text.  Content is for information only; in no way should the information in the book be considered legal advice to anyone on any matter for which there are legal implications.  Any such matter should be specifically addressed with an attorney. The book is available for purchase at or by contacting the Publications Program, Carl Vinson Institute of Government, University of Georgia, 201 M. Milledge Avenue, Athens, GA 30602; telephone 706-542-6377; fax 706-542-6239.