In this article...
In this article, we explain some basic things you should know about purchasing residential property, including: What should I know about Mortgages? Making an Offer, Purchase Agreement and Earnest Money, and Preparing for your Closing.
What to expect when buying a residential property in Wisconsin
Most people, at some point in their life, purchase property. It can be daunting to try and figure out what you are supposed to do, but this article should help give you an idea of what to expect.
In this article, we explain some basic things you should know about purchasing residential property, including:
- What should I know about Mortgages?
- Making an Offer, Purchase Agreement and Earnest Money
- Preparing for your Closing
What should I know about Mortgages?
Getting a Mortgage and Preapproval
Most people cannot afford to buy their first house without a loan. A mortgage is a loan secured by collateral, in this case, the house being purchased is the collateral. If the home buyer (mortgagee) fails to make timely payments on the loan or gives the bank (lender) some other reason to believe their loan is not secure, the bank (lender) can accelerate payment, such that the entire loan is due at once, and the lender can take and sell the house to recoup the losses on their loan.
Depending on your credit, assets, debts, and income you can qualify for a mortgage, ideally with the lowest interest rate possible. It can be beneficial to shop around as some lenders may give better interest rates or have lower costs. If you are serious about purchasing a home, doing the extra paperwork for a lender to get preapproved will help. Once you are preapproved for a mortgage, an offer you make on a house does not have to be conditional on your ability to get a mortgage, because you are preapproved. This makes preapproved buyers more attractive to sellers than those who are not preapproved.
It is generally a good to come up with 20% of the purchase price as a down payment for the property you intend to buy. The larger the sum you can use as a down payment, the smaller your loan will be, and the less interest you will pay over the course of your loan. Most importantly, if your down payment is less than 20%, you will generally be required to pay Private Mortgage Insurance (PMI). PMI is insurance that your lender will make you pay until you have 20% equity in your property. PMI protects the lender so they can recover the amount of their loan in the case of foreclosure that results in a sale lower than the amount of the loan. PMI is normally added to your mortgage payment as a monthly expense, and if you make a small down payment or none at all, it could take several years to pay down your mortgage enough to have PMI removed. Some lenders will remove PMI automatically once you have enough paid down your loan the appropriate amount, though sometimes it is the responsibility of the homeowner to get it removed, which should be done as soon as possible.
Find an amortization calculator online. If you type in the amount of your loan, your interest rate, and how many years you will pay it off over (30 years is standard for mortgages, but can be much shorter), you will be able to see what your monthly payments will be, how much of those payments will go toward interest, and how much of those payments will go toward principle (the amount that you are paying down the loan by). Initially, monthly payments will be paying almost exclusively interest, and you will not be paying off the principle of your loan at all. Later in your mortgage, you will be paying more principle than interest, and gaining more equity in your home with each payment. Amortization Schedules do not include closing costs, insurance, or taxes, so make sure you budget accordingly.
For most mortgages, at least in residential real estate, there are no fees or penalties associated with prepayment of your mortgage. This means that you can pay more than your monthly payment. Paying more than your monthly payment will reduce the total amount that you owe because you will be paying it off faster, and thus, with less interest. Every time you pay over your monthly payment the amortization schedule will change and you will pay slightly less interest and slightly more principle for subsequent payments.
After you have been paying off your mortgage for a while, the market may improve, or you may have improved your financial situation, and you may qualify for a lower interest rate. If that happens, you can refinance by paying off your existing mortgage with a new mortgage that offers a better interest rate and saves you money. Refinancing can also be a tool to “tap equity” by getting a loan for more than you owe. You lose equity in your home, but you get a check for difference between what you owe and the new loan.
Home mortgages above a certain amount are non-conforming “jumbo loans.” As of 2021 most states, including Wisconsin, categorize anything above $548,250 as a jumbo loan. Jumbo loans are harder to get approved for, are riskier for lenders, and often have slightly higher interest rates.
Making an Offer, Purchase Agreement and Earnest Money
However you’re looking for houses, you’ll eventually find something you like and decide to make an offer (also called a purchase agreement, or real estate contract). If you have a real estate agent, it is likely that they will have a purchase agreement that they use. There are many different types of purchase agreement forms, there is no “correct” version, but they all have most of the same important elements. Real estate agents can strike things from purchase agreements, attorneys can edit them.
Purchase agreements will contain basic information, such as the names of the parties, the location and size of the real estate, and the purchase price.
The following are some of the important elements you should consider when going through a purchase agreement:
Fixtures stay with the property after the sale, personal property goes with the seller. It’s not always perfectly clear what is a fixture and what is not, and if the buyer and seller have a misunderstanding, it can make the deal more difficult. Make sure it is clear in the contract what items are fixtures (staying with the property) and what Items are not.
Earnest money is typically a small percent of the purchase price, 1-2% or higher if the buyer wants to indicate that they are more serious about purchasing the property. The buyer will give this money to a 3rd party, often one of the real estate agents, for safe keeping. If the deal falls though for reasons the buyer agrees to in the contract, the seller will get to keep the earnest money.
Often, the contract will be contingent upon something else. The deal may be contingent on the buyer being able to get financing (a mortgage), and buyer will have to show proof of loan approval for a certain amount/interest rate.
Inspections are important. The buyer should have the opportunity to hire an inspector to evaluate the property for pretty much any issues. If the buyer discovers a defect, they can provide notice to the seller and get out of the contract (buyer should be careful not to send the inspection report to seller unless it is requested, because it may be a breach of the contract to do so).
Appraisal is an impartial analysis of the property’s value. If an appraisal comes back below the offered purchase price, a lender might not be willing to give the mortgage loan. A buyer might also be able to use an appraisal lower than the offered purchase price to back out of the agreement.
Another common contingency is the sale of buyer’s real estate. If the Buyer needs to sell their own property before purchasing the property, the contract should be contingent on the buyer’s ability to sell said property. During the time of this contingency, it is possible that the agreement will allow the seller to accept other offers.
Representations and Warranties
Representations are facts that are true at the time they are made. Warranties are a promise that something will be true in the future. For example, “A new roof was just installed this month” is a representation, and “the roof should last at least 15 years before it needs to be replaced” is a warranty. The seller may be required to make some standard representations such as “there are no known zoning, fire, or health code violations,” “there are no easements not shown on public records,” or “there is not hazardous waste on the Real Estate.” However, sellers generally should not make representations or warranties. Many contracts will state that the property is in “As Is” condition, which means that the seller does NOT make any representations or warranties. The responsibility falls to the buyer to look for defects. Often, newly constructed homes have a warranty against defects for a certain period of time.
The standard for real estate agent commission is 6% of the purchase price. If there is a listing agent (for the seller) and a buyer’s agent, they normally split the commission at 3% each. An agent is normally paid at closing. Be aware that some contracts with agents could require payment even if the property does not end up closing, so make sure you know what you are agreeing to. Generally, the agent’s commission is paid by the seller with proceeds of the sale, but negotiation on fees between buyer and seller is common.
Seller’s Possession after Closing
It is not uncommon for the parties to agree that the seller will continue to live in the property for a specified period after the buyer takes possession at closing. As a buyer, you will want to have in the contract that seller will deposit a sum of money at closing into escrow (~2% of purchase price is standard, but get more if you can). The seller will pay an agreed daily amount for their occupancy that will come out of that escrow account. If the seller fails to deliver the property over to the buyer on the agreed upon date, the buyer can get more of the seller’s money out of that escrow account, and other legal remedies may be available as well.
Preparing for your Closing
Once you have a closing date set and everyone is happy with the terms of the agreement, the hard part should be over. All that is left is for the parties to sign documents, and exchange money.
Closing costs will be divided between the buyer and seller. Prior to closing, the title company or whoever is facilitating the closing may send out closing statements. These statements will show how much money each party owes for what, and how much money they will be brining to closing or walking away with after. Closing costs tend to include, but are not limited to:
- Fees for closing.
- Title insurance. Owner’s and/or Lender’s Policies. To learn more about title insurance and why you need it (see the article: link to article) “What is Title insurance and why do you need it?”
- Other insurance, such as homeowner’s insurance.
- Pro rata share of property taxes. The seller will credit the buyer with the portion of the taxes for the time that the seller had possession of the property. For example, if the seller sells the property in May, the buyer will get the property taxes at the end of the year for all 12 months. So at closing the seller credits the buyer with an estimate of what 6 months of taxes should be based on last years taxes.
- Transfer tax is generally $3 for every $1000 for Wisconsin (some counties and municipalities charge their own transfer tax, which increases that number). So, if you bought a $100,000 house, and the transfer tax is 3/1000, the transfer tax would be $300.
- Recording fees to get mortgages, satisfaction of mortgages, and deeds recorded at the register of deeds.
- The real estate agent’s commission(s).
- Fees that might come from the lender issuing a mortgage.
- Money down for escrow (to pay taxes and private mortgage insurance on buyer’s behalf).
- Utilities bills.
Residential Real Estate Documents
If the buyer is getting a mortgage to finance the purchase of the property, then they will have to sign the mortgage and note. These documents will generally be walked through carefully with first time buyers. The mortgage explains the terms of the loan and will be recorded. The note is just the borrower’s promise to repay that mortgage loan. Any future issues with the mortgage or payments will be dealt with through the lender, or through another lender if your lender sells your mortgage to a different lender, which is common (process called assignment). If there is not mortgage, the whole process is a good deal easier for buyers.
The seller, either at closing or prior, will sign the deed to the property over to the buyer. In most residential transactions, especially where the property is a primary residence or secured by a mortgage, the type of deed used will be a warranty deed. To learn more about deeds, (see the article: link to article) “What do I need to know about the deed to my property?”. After the deed has been sent to the register of deeds to be recorded, it will be sent to the buyer (grantee).
There are several other insurance documents, affidavits, and accountings of costs that parties may be required to sign, someone at the closing will be able to explain what the relevance of those documents are. Once the closing is done, congratulations, you’re the proud new owner of your home.
While real estate agents can be an excellent resource in the home buying process, they are paid based on the number of sales they make and the purchase price of those sales. Having an experienced attorney represent your interests and provide advice can help ensure you are making the best decisions and protecting yourself during a major financial moment of your life. You should have confidence and peace of mind going into homeownership.
What to Expect From a Consultation
The purpose of a consultation is to determine whether our firm is a good fit for your legal needs. Although we often discuss expected results and costs, our attorneys do not give legal advice unless and until you choose to retain us. Although most consultations are complimentary, some may carry a charge depending on the type of matter and meeting location.