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How Credit Reports Affect the Real Estate Process

Establishing a credit history is important for individuals wishing to borrow funds to purchase property for residential or commercial purposes. When applying for a loan, lenders will obtain a credit report that includes a detailed and factual record of an applicant’s credit payment history. A credit history is built by making payments towards any type of debt including credit cards, car loans, student loans and mortgages.
Credit reports are provided by a credit bureau for purposes permitted by law, generally as part of a loan application. Experian, Transunion and Equifax are the three primary Credit Reporting Agencies (CRA) in the United States. Bureaus collect the information in credit files directly from creditors along with government agencies such as legal court systems.
Identity theft and errors in credit reporting can damage credit files. To ensure accurate credit history reporting, a credit monitoring service can be purchased. Credit monitoring services often provide complete credit reports and updates monthly.
The Fair Credit Reporting Act (FCRA) is a United States federal law that protects consumer rights by regulating the collection, distribution, and use of consumer information, including consumer credit information. Consumer protection under the FCRA includes:

  • The right to receive a copy of your complete credit report with all information on file included at the time of the request
  • The right to receive the name of anyone who obtained your credit report in the last year for general purposes or in the last two years for employment purposes. If your application for credit was denied based on information received in a credit report, the company must provide the name and address of the CRA that supplied your information.
  • The right to receive a free credit report when your credit application is denied because of information supplied by a CRA. To obtain the free report, you must request it within 60 days of receiving a denial notice.
  • The right to contest the accuracy of information in your report. Both the CRA and the company that provided your information to the CRA are obligated to investigate your dispute. If your dispute is not resolved to your satisfaction, you are entitled to add a summary explanation to your credit report.

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What Home Inspections Should Include

When purchasing a residential property, it is helpful to know as much information as possible regarding the condition of the home being purchased so that the buyer can make an informed decision. Performed by an objective licensed professional, a home inspection is a complete and systematic visual analysis of the physical structure and systems of a home. A home inspection evaluates all major components of a property including:

Heating and central air conditioning systems
Interior plumbing and electrical systems
Roofing and framing
Attic and visible insulation
Walls, ceilings and floors
Windows and doors
Appliances and fixtures
Foundation, basement and structural components
Decks and patios

A buyer will receive a written report with all pertinent findings and can then decide whether to move forward with a home purchase as is, ask the seller to make repairs or walk away from the transaction. Nearly all homes, including new construction, will have some building defects. By obtaining a home inspection, buyers can minimize unpleasant surprises and unexpected difficulties and learn more about the property being purchased.

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Selecting a Home Inspector

A home inspection is an integral part of a residential purchase and the inspector should be carefully chosen based on the following criteria:

  • How much experience does your inspector have? As in many fields, experience is a sign of knowledge. Home inspection is a complex process that requires extensive field experience—an apprenticeship is often considered 500-1000 home inspections. Look for an inspector with at least three years of field experience.
  • Is your inspector affiliated with state or national associations? Often, the only professional regulations in the home inspection field are those designated by the National Association of Home Inspectors, the American Society of Home Inspectors (ASHI) and comparable state organizations. Inspectors who belong to these organizations are required to adhere to strict standards of practice and receive continuing education.
  • Does your inspection possess building code certification? While code compliance is not the focus of a home inspection, an inspector with building code certification has the knowledge to identify problems that have an origin in code-related standards. Certification is often a requirement for municipal building inspectors.
  • Does your inspector carry Errors & Omissions insurance? A sign of an inspector with accountability is one who carries insurance for an erroneous inspection. Uncovered faults in a home can range from minor to catastrophic. Carrying insurance is a sign that your inspector takes his or her job seriously and offers protection to the consumer. There are two types of E & O insurance, with the best coverage being offered by a ‘per occurrence’ policy where the buyer will still be covered in the event that the home inspector goes out of business. The second type is called ‘claims made’ and may only be effective on the date of the inspection.
  • Will your inspector provide a sample report? Request a previous report prior to see how the inspector organizes the information. A good home inspection report should be exhaustive and precise yet easy to understand for the average reader. It should focus on pertinent property information not maintenance recommendations. Quality reports often include a summary of important defects along with extensive evaluation.
  • What will be the cost of inspection? Home inspection prices are determined by a number of variables such as the size and location of the home, however a typical home inspection will usually be around $300 for an average sized home. Approach very low cost inspections with caution as an accurate home inspection can be one of the most important purchases you make. Costly mistakes for the home buyer can result from a bargain report performed by an inexperienced inspector.

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Why Home Inspections Matter

Many real estate agents will stress the value of home inspections leaving the buyer to wonder whether it is a necessary expense. An “As-Is” purchase may sound appealing due to its seeming simplicity but a home inspection is a valuable consumer protection tool when negotiating fair market value. Walking into escrow with complete information regarding the property at hand allows the home buyer to feel confident in what could be the largest purchase he or she will make in a lifetime.
All properties regardless of age, condition or craftsmanship will possess defects, many undetectable to the untrained eye. An experienced and quality home inspection professional will determine insufficiencies from large to small and make recommendations regarding the seriousness of each issue.
A home inspection can provide peace of mind as to the condition of integral components of a home including structural framing, foundations, ventilation, insulation, roof condition and attic construction.
A home inspection can also alert the buyer to future issues such as drainage problems, faulty electrical systems, code compliance, building settlement and much more. Choosing to perform a home inspection allows a buyer to make an informed decision regarding the final purchase of a property and avoid possible heartache and costly future repairs.

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Why New Homes Need Inspections

Nothing is ever perfect, including a new construction home. Human error can result in a number of problems that may not reveal themselves until years later including faulty electrical wiring, foundation issues and defective roofing installation. Regardless of the quality of construction or reputation of the builder, many problems can be uncovered in an inspection of a new home that may save the buyer time, money and heartache down the road.
Even a new home warranty, typically offered for a year from the purchase date, does not always protect the buyer from potential issues. Building defects and safety issues may not be revealed for years or until the buyer decides to sell. Choosing to inspect a new home allows the buyer to enter into escrow with confidence and knowledge.

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What is the Purpose of Home Inspection?

Buyers are often under the impression that sellers are responsible for repairing all items revealed in a home inspection. In fact, sellers are under no legal obligation to make repairs unless designated in a purchase agreement or where requirements are set forth by state law or local ordinance. Examples of laws or ordinances include the number and configuration of smoke detectors and the installation of earthquake straps on a water heater.
All homes have defects and it is unrealistic to expect to find a home in perfect condition. Buyers can use a home inspection report as a negotiation tool by asking the seller to make repairs or to lower a purchase price.
When choosing which repairs to request, avoid routine maintenance issues and focus on any larger problems revealed, especially those that affect safety and involve active leakage. Contracts usually require basic systems such plumbing and issues such as leaky roofs to be repaired by the close of escrow.
The primary purpose of a home inspection is so that the buyer knows the condition of the home he or she is buying. Making extensive repair requests could alienate the seller and terminate the deal so buyers should proceed with caution.

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The Visibility Factor in Home Inspections

The American Society of Home Inspectors (ASHI) designates accepted codes of ethics and standards of practice that qualified home inspectors typically use as guidelines when defining their services. According to ASHI, a home inspection is restricted to conditions which are visually discoverable. Issues that exist within walls, ceilings or floors or which are underneath the ground are excluded from the scope of examination. Under ASHI standards, inspectors are not required to record conditions that would require the dismantling of construction or excavation of ground services.
When reviewing an inspection report, buyers should note the scope and limitations defined by the inspector. Generally, inspectors will outline the parameters of the home inspection performed in either the initial contract or the report. The majority of inspectors will use ASHI standards as the basis for their services and the inspection will be limited to discovery of conditions that are normally visible.

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Understanding Title Procedures

A title is what grants the buyer ownership of a property. Obtaining a clear title is important for ensuring that both the buyer is purchasing a property without liens against it or claims of ownership from the relatives of former owners and that the lender is supplying funds for a legitimate sale. Key items in the title process include:

Title Insurance
Title insurance is another form of protection for a buyer in a residential real estate transaction. It insures the buyer is fully disclosed of all liens against the former owners of the property and of any documents that may restrict the buyer’s use of the property such as easements granted by prior owners. Title insurance insures that the buyer will receive a marketable title to a property and protects against title defects from past events.
Title Search
Title companies will perform a thorough search of all public records associated with a property including deeds, wills, and trusts to determine current recorded ownership, recorded liens or other matters of record that could affect clear title to a property. Following the title search, the title company will prepare a Preliminary Title Report.
Preliminary Title Report
A Preliminary Title Report provides all pertinent information for the property to successfully be brought to escrow. It includes a legal description of the property, a plat map and information regarding the ownership of the property such as the manner in which the owners currently hold title and matters of record that would prevent the granting of clear title to the buyer including liens, restrictions or interests of others. It is important to note the type of ownership rights that will be transferred. The most common is “fee” or “fee simple”, a freehold ownership where owners possess complete ownership of the home and land, but are still subject to taxation and debt obligations on their mortgage.
Title Insurance Coverage
A Preliminary Title Report will also detail the coverage offered by the title insurance policy. Not all risks can be eliminated by a title search of public records including hidden defects such as forgeries, identity of persons, incapacity and failure to comply with the law. A title insurance policy provides coverage against hidden defects making the insurance company liable for most claims that could be made against ownership. Title insurance is a one-time, up-front investment with rates based on the purchase price of a property and the type of insurance purchased.
Extended Coverage Options
The American Land Title Association (ALTA) offers extended owners’ and lenders’ policies that cover matters that are “off record” but generally discoverable including unrecorded liens and encumbrances, unrecorded easements, unrecorded rights of parties in possession and encroachments or discrepancies in boundary lines. To determine whether this type of additional coverage may be needed, it is important to review the policy being offered by the title company and determine any limitations.

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Understanding the Escrow Process

In a real estate transaction, escrow occurs when an impartial third party possesses the documents and funds for the transaction. The escrow holder is responsible for making sure that all conditions of the transaction are satisfied based on the terms of the transaction and the lender’s requirements. Escrow can also refer to an account established by a lender to hold monthly installments from the borrower for property taxes and insurance.
Responsibilities of an Escrow Holder include:

Receiving and holding all payments, documents and instructions pertinent to a real estate transaction
Acting as a liaison between the borrower and lender
Ordering a preliminary title search to determine title status
Requesting the title insurance policy
Requesting a payoff statement from any existing liens on the property
Holding insurance documents, deeds and inspection reports
Adhering to the lender’s requirements for escrow
Furnishing or attaining the grant deed
Prorating taxes, insurance, interest or any other costs related to the property
Recording the deed and any other required property documents
Closing the escrow according to the instructions of the purchase agreement
Disbursing all funds authorized by the agreement including commissions, payoffs, taxes, insurance and any other costs
Preparing final statements detailing dispersion of escrow funds

In many mortgages, the lender will be responsible for making annual payments for the borrower’s property taxes and homeowners insurance. An escrow payment is funds withdrawn from a borrower’s account to satisfy these expenses. Lenders will do a periodic escrow analysis to ensure that the proper amount of funds is being withheld from a borrower’s monthly mortgage payment to cover escrow expenses.