RE/MAX Lake LivingstonErnest Money ContractYou are finally ready to write the contract. How do I do this? The standard form used in the State of Texas is the earnest money contract. There are other forms used such as a letter of intent or contract for sale, but they are very rare in Texas, especially in residential. There are many forms to the earnest money contract depending on the type of property and the type of financing the buyer is attempting to secure. Most of us purchase the "Single Family Home" which is the type of contract that I will discuss. The condominium uses another form, although very similar. The buyer’s who want to buy using either FHA or VA financing will use a slightly different contract although the parts are nearly the same. The most common is the conventional loan earnest money contract referred to as "ONE TO FOUR FAMILY RESIDENTIAL EARNEST MONEY CONTRACT" Read the following earnest money contract. It is for a conventional loan. VA & FHA contracts require a slightly different contract. The following are explanations of the standard conventional Texas Promulgated earnest money contract. Legal DescriptionThis is the survey description. It goes by the lot number along the street and the block where the lot is located. It is under this description that the property is recorded. The legal description if for the land only. The sale of the property will state that it is for land and improvements. Improvements on the land may come and go, but the land will stay the same. So will the legal description. AddressThis is the street address. Note in the earnest money contract that the land is conveyed with all of the improvements. The house that you are buying is considered an improvement. Along with the house are everything that is attached to it. All of the window coverings, the air conditioner, the plants, the mini blinds, garage door openers, plumbing fixtures, stove are considered part of the house. If the seller decides to take the window coverings if it were not disclosed that he was going to do so in the seller’s disclosure or in the earnest money contract, he is in violation of the contract. Basically, anything attached to the house is considered part of the house. Sales Price & Down PaymentThe offer price is stated in the contract. The down payment is also stated and will be based on the type of financing that the buyer is trying to secure. If the buyer says that he is going to put down 5% of the sales price and does not have the cash to do so, he will not qualify for the loan. If he says that he will put down 10% of the sales price and decides later he only wants to put down 5% he can do so provided this does not cause him to fail to qualify for the loan. The buyer must be able to put down what he states in the contract. You may be held to do it even if you don’t want to or change your mind. Type of FinancingThe best type of financing should be predetermined by either your Realtor or loan officer. This is another reason to get pre-qualified or pre-approved. Certain programs are better than others depending on the situation. Some will allow for a lower down payment, some will tolerate a greater credit problem than others. This will be discussed later in the financing section. The contract calls for the buyer to make application for credit within a certain number of days and attain the financing within another certain number of days. This is the option period for the buyer. If he does not make application within those days, he has not fulfilled his obligations and the seller could cancel the contract. Also, if the buyer does not have an approved loan within the agreed number of days, the seller may cancel the contact as well. This is another reason to be pre-approved. Earnest MoneyOnce the seller has taken his house off the market he has given consideration to the buyer. The consideration that the buyer gives to the seller is cash. This cash is not paid to the seller, but to a third party, normally a title company. Since this is a conditional contract, if the conditions cannot be met (Other than default) then the money will be returned. The normal amount is around 1.0% of the sales price. This too is negotiable. Title PolicyThe title policy is issued by a reputable title company that insures that the title conveyed to you is indefensible. This means that if there is a lien on the property that was not cured or discovered before you purchased the property, the title company will cure the problem. Most lenders will require the buyer to have a title policy issued before they will fund a loan. The reason for this would be if there is a prior lien, the first mortgage that you lender placed on the property would be inferior. This also means that you owe more than you thought. The title policy guarantees the condition of your title. The title company in the sale of a property is responsible to check for liens, taxes, encumbrances and do the actual closing of the transaction. Many think that the mortgage company closes the transaction, but this is not so. It is the title company. It could be done at an attorney’s office, but they still have to issue a title policy, so most use title companies in Texas. The title company is the disbursing agent. They pay off prior liens, get releases of those liens, pay the taxes, collect escrow accounts for the lender, pay the closing expenses per the earnest money contact, etc. Once you have gone to the title company and funded your loan, you are done. (Other than paying the mortgage for the next 30 years) SurveyThe survey is required by the mortgage company and the title company. This gives the boundaries of the land that you are buying as well as the location of the home, the fences, garage, easements, encroachments, etc. It is needed by the title company to get the proper legal description of the property. It is needed by the lender and you to make sure that such things as your neighbor’s improvements are not on your property. It is also there to show the location of all the improvements. It will show the location of any easements. Sometimes a prior property owner will build on the utility easement. This is not allowed by the utility companies unless they sign a waiver. The mortgage company will normally not fund the loan with encroachments on the utility easement. The easement is there so that utility companies for as water, sewer or power can repair and service the pipelines. They can’t do it very well if the homeowner’s build on top of the easement. Any property built where it is not supposed to be is considered an encroachment. Most of the time these have to be remedied. Many times the remedy is a waiver. That means you or your neighbor has permission to be there even though he does not own the land. Property ConditionThe buyer has several choices on how he wants to negotiate with the seller regarding the condition of the property. The first, and least recommended, is to buy "As Is". This is obvious. If you buy this way, you better be buying a "Fixer Upper" at a low price. Realtor’s do not like this type of contract since it can always be a problem later on especially if the buyer thinks the seller covered up something that should have been disclosed. The second choice, and much preferred, is to make the condition of the property subject to inspections. Once inspected, the buyer does not have to buy the property if he finds repairs that are too numerous. If the seller is unwilling to do the repairs and they are too numerous, the buyer may terminate the contract and earnest money will be returned. Sometimes the negotiation of the contract is a two phase process. First, the contract terms and price then the condition and what the seller has to do to sell the house. InspectionsThe buyer has the right to inspect the property within a certain named period of time. (Normally within 10 days of the effective date of the earnest money contract) He has the right to inspect per the property condition addendum. This addendum states that he may inspect for termites, structural, mechanical, (A/C & Heating) electrical, plumbing, roof, appliances, siding, paint, etc. This does not mean that a buyer can complain about the color of paint or that they would like white countertops in the kitchen. These have to be required repairs or code violations. Once the inspection is completed, the buyer turns the report to the Realtor and he delivers it to the seller. The seller may either accept the report and repair all that is on the list since it was within the allowance or he may ask the buyer to prioritize the list. This means that the buyer will choose those items that he feels are important. This can go back and forth until buyer and seller agree to the extent of the repairs that the seller will provide. This can also be settled by stating an amount. Once agreed, this condition of the earnest money is met. The buyer has the right to inspect the repairs, but cannot make the seller change them if they are done in a workman like manner. Option PeriodThe buyer has the right to consider all aspects of purchasing the house during the first 10 or 15 days of the effective date of the contract. This is normally when the inspections are done to determine the condition of the house. However, this is not the only reason for the option period. During the option period, the buyer may terminate the contract for any reason. In order for the option period to be in effect, the buyer has to pay for that privilege. On a $ 100,000 house, the cost usually will be $ 100 to $ 250. If the buyer determines that he does not want the house, then that money goes to the seller. The seller then returns the earnest money and the contract is null and void. Broker’s RepresentationThis must be fully disclosed in the contract. It will show the listing agent and the fact that he represents the owner, It will show the selling agent and whether he represents the buyer or seller. Closing date and OccupancyThis causes more problems and arguments than any other part of the negotiation process. Think carefully when planning the date of closing. First, the date is not absolute, it is a target date. There are contractually extensions of this date based on whether certain conditions have been met. Don’t pack you bags and move until the actual closing date has been set and all of the conditions have been met. Any condition not properly met will delay the closing. It is not a done deal until the buyer and seller sign papers. Anything can go wrong. For the most part, once a contract has been written, the house will close. It is rare that they do not, but most of the time it will take patience and willingness to work through problems. I guarantee, the closing process will not go perfectly. There will always be some compromise and patience will be required. If possible, make possession a few days later than the closing date. This will allow the seller to get out of the house and have it ready for the buyer. Special ProvisionsThis is where the buyer asks for anything special he wants the seller to do for him in order for the buyer to purchase the house. This would be where the buyer asks for the house to be painted, carpet to be installed or for the seller to pay for some of the buyer’s closing costs. Buyer’s ExpensesThere are other details in the contract such as normal buyer and seller expense. You should have your Realtor or loan officer give you a good estimate of what the total cost to close will be as well as the monthly payment. This will include taxes, insurance, mortgage insurance etc. It will not include the cost of maintenance fees. Mortgage InsuranceMortgage insurance, commonly know as foreclosure insurance is added to the mortgage. If you are doing a conventional loan, it is called private mortgage insurance (PMI) if FHA loan it is called mortgage insurance premium (MIP) and VA it is called a funding fee. They all have their own rates, but for the most part will add about .6 of one percent to the payment. On $ 80,000.00 loan about $ 40.00 per month. To avoid mortgage insurance, pay 20% down and it is eliminated. Mortgage Insurance whether by the government under the FHA or VA or conventional lenders through private mortgage insurance companies is foreclosure insurance. They will insure usually the top 20 to 25% of the loan. The lender does not take the risk on the first part of the loss, the PMI company does. This is why if you put down 20%, there will be no PMI insurance. DefaultThe contract calls for mutual specific performance. This means that after all of the conditions have been met, if one or the other party decides that they do not want to go through with the transaction, the damaged party can force that person to close the transaction or be asking for a law suit. This does not mean that if something is wrong with the house, or the buyer cannot get financing he is liable for suit. But, once the conditions in the contract have been met, or a party does not proceed with the requirements of the contract, then that person is liable. In lieu of suit, the buyer can give to the seller the earnest money. If this is done, both parties have to agree to cancel the contract and sign an earnest money release. If neither party can agree, and the buyer wants the earnest money returned, the title company does not have to return the money until it is settled. The seller cannot resell the house until the earnest money is released since that would be like having a contract with two parties at the same time. For this reason it is difficult to collect earnest money even if the buyer is in default. Seller’s DisclosureThis is the form where the seller tells the buyer what he knows about the property. If there are any defects, he must list them in the disclosure. If the drapes don’t stay in the house, he must let the buyer know. Both the buyer and the seller will sign this disclosure. It is very important that this is correctly filled out. I usually do this on my copy while the owner fills out his copy one check at a time. There are more law suits about property condition than any other portion of a real estate transaction in residential real estate. A copy of this form is enclosed. Lead Based PaintThis form has just been added to the requirements. It states that homes build prior to 1978 may have some or all of the home painted with lead based paint. If further states that they may have an inspection to determine if the house has lead based paint. It asks the agent to give each person a pamphlet regarding lead based paint and sign to acknowledge that they have received the notice about lead based paint. What is all the fuss about lead based paint? The problem about lead based paint is that it can cause serious health problems. This is particularly a problem with children and it primarily effects the neurological system. So, we want to protect our children and don’t want them damaged by toxic lead in their systems from paint. How do they get lead in their systems. I am not a doctor nor claim to be an expert in this field. If you want more details on this, I suggest that you get in touch with the environmental protection association (EPA) however, I can give general comments that should be sufficient to make you aware that this problem exists and you need to protect yourself and your family. Lead based paint is primarily in oil paint It is primarily found in the trim wood in the house and sometime in the outside paint. It is rarely in water based paint. The paint, as it gets older will oxidize and form a sort of dust. This dust can fall down on the window sills or be washed into the dirt around the house in the case of outside paint. It can chip or deteriorate. If the child gets into the dirt or gets his hands on the dust in the window sill, and ingests the lead, he may be poisoned. It does not take very much toxic lead to damage a child severely. I have included a copy of the form that a person must sign regarding lead based warning. You will be required to sign the same when you buy a home build prior to 1978. You will also be given a pamphlet that gives you detail about the lead based paint. I will not give a copy of this pamphlet. You may ask your agent for a copy EPA 747 - K - 94 - 001, May 1995. If there is concern on your part you can have the house inspected. The cost is bout $ 350.00. They will x-ray the paint to find lead based paint. They will give a risk assessment of the home to tell you if there are any sources of serious lead exposure such as peeling paint and lead dust. It will also tell you what actions you should take to address there hazards. The federal government is writing standards for inspectors and risk assessors. Make sure that you use a professional who comes up to these standards. What can you do to protect your family?
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