The developer will bring in a city inspector to do a separate final inspection-and you'll need a certificate of occupancy by the closing. Realtor Mark Nash says, "The developer normally schedules such an inspection a couple of days before closing-you may not even know it's taking place. If the house fails, your lender won't fund your loan. Failures are usually due to basic safety or habitability issues, such as potable water, sewage, or heating." (In some communities, a closing can go forward with a "temporary certificate" that says the house is habitable, even if lacking some features.) Because the lender requires this certificate to close the deal, check with your closing agent to make sure the developer has forwarded it. Realtor Mark Nash says, "The developer normally schedules such an inspection a couple of days before closing-you may not even know it's taking place. If the house fails, your lender won't fund your loan. Failures are usually due to basic safety or habitability issues, such as potable water, sewage, or heating." (In some communities, a closing can go forward with a "temporary certificate" that says the house is habitable, even if lacking some features.) Because the lender requires this certificate to close the deal, check with your closing agent to make sure the developer has forwarded it.

Removing a Financing Contingency

To remove a financing contingency, you must obtain financing (a loan) on the terms stated in your contract. That means either following up with whichever lender preapproved you or finding another lender that offers a better deal. (If you aren't preapproved, collect the documents described in Chapter 3 and listed on the "Financial Information for Lender" form in the Homebuyer's Toolkit.) In any case, your mortgage broker or loan officer should help you.

If you were preapproved, your lender will probably add a few requirements for your "final" approval, including verification of your credit, income, and employment; a property appraisal; and, in some cases, a property survey.

The appraisal assures the lender that you're not borrowing more than the house is worth. While the lender or broker will probably coordinate the appraisal, you'll receive a copy of the report. If the house is appraised for less than you've agreed to pay, the lender may not approve the loan. Likewise, you may not want to purchase the property for what you'd originally agreed and can use the appraisal to either back out of the deal or renegotiate the purchase price.

Once the various requirements are met, the lender will give you an "approval" or "commitment" letter mentioning the exact dollar amount, which you can show to the seller as you remove the financing contingency. If you're borrowing from a family member or friend, you'll need a letter from that person explaining how much you're borrowing and on what terms (as described in Chapter 7). Attorney Fred Steingold counsels, "Never remove a financing contingency until you have the lender's written approval or commitment in hand."

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It's not final until closing day. All commitment letters have some conditions attached, allowing the lender to back out if your financial status changes before closing. And, adviser Russell Straub warns, "I know of homebuyers who stopped paying their credit card bills, thinking they already had their loan commitment-thereby destroying their eligibility." Similarly, quitting your job or emptying your savings account could disqualify you for the loan. All commitment letters have some conditions attached, allowing the lender to back out if your financial status changes before closing. And, adviser Russell Straub warns, "I know of homebuyers who stopped paying their credit card bills, thinking they already had their loan commitment-thereby destroying their eligibility." Similarly, quitting your job or emptying your savings account could disqualify you for the loan.

Community Interest Developments: Special Contingencies

If you're buying into a community interest development (CID), you may have some additional contingencies to take care of: * Approval of documents. Approval of documents. Your contract should require that you be given, and have a chance to approve, documents such as the CC&Rs or master deed, budget, rules and regulations, and meeting minutes. This is your last opportunity to critically examine (with the help of your real estate agent or attorney) whether you're ready to be subject to the rules of the community association and whether it's financially stable. Your contract should require that you be given, and have a chance to approve, documents such as the CC&Rs or master deed, budget, rules and regulations, and meeting minutes. This is your last opportunity to critically examine (with the help of your real estate agent or attorney) whether you're ready to be subject to the rules of the community association and whether it's financially stable.* Membership in the community association. Membership in the community association. You'll likely need to submit an application to join the community association and to pay a move-in fee. Try to do this as many weeks as possible before the closing. Your application will need to be accepted before the sale can be completed. You'll likely need to submit an application to join the community association and to pay a move-in fee. Try to do this as many weeks as possible before the closing. Your application will need to be accepted before the sale can be completed.* Co-op board approval. Co-op board approval. This is required for you to join a co-op and usually involves an application and interview. You'll have to provide detailed financial information about yourself, plus letters of personal and professional reference, possibly including a recommendation from your landlord. You'll also need to provide details regarding your transaction, like a copy of your contract and a commitment letter from your lender. You may also be rejected if you're caught lying on the application; if you can't comply with requirements of the proprietary lease (for example, you have a pet, which the lease prohibits); or if you seem difficult, inflexible, or hard to live near-which they'll discover by interviewing you. This is required for you to join a co-op and usually involves an application and interview. You'll have to provide detailed financial information about yourself, plus letters of personal and professional reference, possibly including a recommendation from your landlord. You'll also need to provide details regarding your transaction, like a copy of your contract and a commitment letter from your lender. You may also be rejected if you're caught lying on the application; if you can't comply with requirements of the proprietary lease (for example, you have a pet, which the lease prohibits); or if you seem difficult, inflexible, or hard to live near-which they'll discover by interviewing you.

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Interview a co-op's board, too. "The interview is your chance to see whether you like the board," says New York attorney Richard Leshnower. "Although they ultimately decide whether you're allowed in, you should use the opportunity to find out as much as you can about the co-op, like whether any special assessments are coming up, or what condition the building is in." "The interview is your chance to see whether you like the board," says New York attorney Richard Leshnower. "Although they ultimately decide whether you're allowed in, you should use the opportunity to find out as much as you can about the co-op, like whether any special assessments are coming up, or what condition the building is in."

Removing Other Contingencies

Other contingencies can be removed in much the same way as described above. For example, your agreement should contain a final walk-through contingency, allowing you to give your property (whether newly built or old) one last look to make sure it's in good shape and the seller has moved out. Because this often happens right before closing, we address it in Chapter 14. And getting title insurance was probably another contingency in your contract-you'll find a whole section on it below. You may have made the sale contingent on your successfully obtaining homeowners' insurance, which is fully discussed in Chapter 13.

Review your purchase agreement, particularly any deadlines for completing and removing any other contingencies. If you fail to follow the agreed-upon timeline, for example, because you didn't get around to hiring an inspector, that contingency may not be enforceable anymore. Your real estate agent or attorney should help you understand, keep track of, and meet these deadlines, but you should be well informed, too.

If You Can't Remove a Contingency

If you can't remove a contingency-for example, your loan falls through or you can't find adequate homeowners' insurance-your range of options include waiving the contingency so that the deal will go through, settling for less than you hoped for (for example, getting a higher-interest loan), or pulling out of the deal. (Of course, you can't waive contingencies that the seller negotiated for in order to protect the seller's own interests.) To waive a contingency, you'd execute a written release form. This form notifies the seller that even though you agreed to terms that can't be met, you'll still go through with the deal.

If the seller is eager for the deal to go through, you may be able to renegotiate the terms and offer less money for the house.

If, however, you decide based on the unmet contingency to pull out of the deal, you and the seller should sign a release cancelling the contract (your state may require this). You'll get your earnest money deposit back, provided the seller agrees that the contingency can't be met and the deal is over.

Aack! If the Seller Won't-or Can't-Transfer the Property Some deals go sour even when you've done everything you're supposed to. Here's what will happen next, if:* The seller calls it off. The seller calls it off. The seller may have a change of heart about moving or think a better offer is around the corner. If so, try to resolve the dispute according to the terms of your agreement-which may mean an arbitration, mediation, or a lawsuit. You'll probably be able to recover the amount you spent getting into the arrangement, but a court is unlikely to order that you get the property. The seller may have a change of heart about moving or think a better offer is around the corner. If so, try to resolve the dispute according to the terms of your agreement-which may mean an arbitration, mediation, or a lawsuit. You'll probably be able to recover the amount you spent getting into the arrangement, but a court is unlikely to order that you get the property.* The seller dies. The seller dies. In theory, the dead seller's estate must honor the purchase contract. Still, the transfer may slow down, especially if the executor or administrator of the estate doesn't understand the law and doesn't want to sell. Get an attorney's help. In theory, the dead seller's estate must honor the purchase contract. Still, the transfer may slow down, especially if the executor or administrator of the estate doesn't understand the law and doesn't want to sell. Get an attorney's help.* The seller won't move out. The seller won't move out. Despite the change of ownership, some sellers just decide to stay put! You might have to go to court to evict the seller, just as you would a tenant, and to recover some of your costs. Adviser Nancy Atwood recalls, "We had a case where the seller's mother, who lived in the in-law apartment, simply refused to move. The buyers ended up renting to her for a year, by which time they'd all gotten very friendly, and the buyer was sad to see her go!" Despite the change of ownership, some sellers just decide to stay put! You might have to go to court to evict the seller, just as you would a tenant, and to recover some of your costs. Adviser Nancy Atwood recalls, "We had a case where the seller's mother, who lived in the in-law apartment, simply refused to move. The buyers ended up renting to her for a year, by which time they'd all gotten very friendly, and the buyer was sad to see her go!"* The house is destroyed. The house is destroyed. If fire, flood, or another calamity severely damages or destroys the house, look to your purchase agreement for guidance. If the seller still has legal title or physical possession, you probably won't be responsible, but if you've already received title or physical possession, you will be. If fire, flood, or another calamity severely damages or destroys the house, look to your purchase agreement for guidance. If the seller still has legal title or physical possession, you probably won't be responsible, but if you've already received title or physical possession, you will be.

Will It Really Be Yours? Getting Title Insurance

Soon after your purchase agreement is signed, your closing agent will launch the process of getting you title insurance. (Except for a co-op, where it's not needed.) Usually your closing agent or attorney will choose your title insurer for you, from whichever of the five major U.S. title insurance underwriters it always works with or is affiliated with.

Title insurance protects you from the possibility that your seller, or previous sellers, didn't really have 100%, free and clear ownership of the house and property and can't rightfully transfer full ownership to you.

How Much Title Insurance Will Cost

On average, premiums are a one-time fee of around 0.5% of a house's purchase price, with a national average of about $1,100. A few states' laws set baselines-but not limits-on premiums (thanks to industry lobbying). The policy limit, or maximum payout, is usually set as the purchase price of the property.

In most Western states, the seller pays for title insurance; elsewhere, it's the buyer's responsibility. You probably settled this when you negotiated the purchase contract. To learn more, see adviser Sandy Gadow's article "How Your Title Insurance Dollar Is Divided Up," available at www.escrowhelp.com.

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Buying in Iowa? By law, you can buy only state-sponsored title insurance (called a title guarantee), which costs about half as much as a private policy. By law, you can buy only state-sponsored title insurance (called a title guarantee), which costs about half as much as a private policy.

How a House's Title Can Get Clouded

Before we talk about what title insurance covers, let's focus on how a house's title can have problems ("clouds" or "defects") in the first place. At the most extreme, the seller doesn't really own the place-there have been instances of renters posing as sellers. Typical title issues are less worthy of a crime show, but more complicated. For example, the seller might have copurchased ten years ago with a brother he hasn't talked to since and doesn't realize that he needs his brother's signature to sell. Or a problem might be lurking in the more distant past.

Not all title problems involve the whole house, either. For example, liens may have been filed against the house-that is, people or agencies may have, within the public records, legally claimed the right to be paid from the proceeds of the property's sale, in order to settle the owner's debt to them. Typical debts include taxes, child support, and contractor's fees. These liens stick to the house like glue, until the house is sold or foreclosed on.

Or your new neighbors, the public, or the government may have the right to walk across or use parts of your property. This right is called an "easement." Most properties have some easements attached to them, usually by utility companies. They can be a good thing for you as the owner-perhaps your property comes with an easement to access your house using a private road belonging to someone else.

Uncovering and Removing Clouds on Your House's Title

You probably want the security of knowing the title is clear before the house is yours, right? That's what the title insurance company wants, too, to avoid paying later claims to you. Accordingly, a "title search" will be your title insurance company's first task (or your attorney's, depending on which state you live in-we'll just use the term "title insurer" from now on).

The search involves combing through as many as 50 years' worth of public records concerning the house, including past deeds, wills, trusts, divorce decrees, bankruptcy filings, court judgments, and tax records. According to the American Land Title Association (ALTA, at www.alta.org), its members find defects or "clouds" on the title in 35% of title searches.

The resulting preliminary title report (sometimes called a "title insurance commitment," "commitment of title," or "encumbrance report") gives everyone a chance to eliminate trouble spots before proceeding with the sale-or to call the sale off, if anything too serious is uncovered. It also lets everyone know the conditions under which you'll be offered insurance. For example, some things that can't be known or cleared up will be excluded from coverage.

Your closing agent should send you (and your agent and attorney) the preliminary report. Review it and ask your attorney or closing agent questions until you understand it. If the report refers to recorded documents such as easement agreements or building-and-use restrictions, ask for copies of the actual documents to see what they contain.

Also look at the included plat map (showing the boundaries from when the area was first subdivided). It's easy to read, showing the property's location and size. Look for any inconsistencies-for example, between the map and what you've observed in person ("Wait, there's a fence there!"). Don't take this map as the last word, however, because only a surveyor can tell you exactly where the boundary lines are drawn (see "Is That Tree on Your Side or Ours?" below). If any easements are mentioned in the report, ask the title insurer to point out where they are on the plat map (they won't be shown).

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Big reason to read the preliminary title report: Only you know your plans for the property. Says expert Sandy Gadow, "What if you're fantasizing about building a swimming pool, but never bothered to tell anyone? Finding out there's an easement in the way later on could prevent you from building the pool. Make your future plans for the property known to your closing agent, attorney, or real estate agent." Only you know your plans for the property. Says expert Sandy Gadow, "What if you're fantasizing about building a swimming pool, but never bothered to tell anyone? Finding out there's an easement in the way later on could prevent you from building the pool. Make your future plans for the property known to your closing agent, attorney, or real estate agent."

Fortunately, you shouldn't be the one who has to act on any title defects. You won't, for example, have to call the seller and say, "Hey, pay off your taxes and child support already." Since you're being promised clear title, it's the seller's problem, not yours. The closing agent will normally call the seller's real estate agent if the report shows a defect. Most sellers agree to pay off any liens through a deduction from the purchase money at closing.

After All That Prelim Work, Why You Still Need Title Insurance

After the title search process, you can feel pretty comfortable that the house will be yours alone (subject to a few easements and exclusions). So why do you need a title insurance policy? It's protection for you and your lender in case the report missed any clouds on the title.

If you're taking out a mortgage loan, your lender will require, at a minimum, that you buy a "lender's policy" (also called a "mortgagee's policy"). This reimburses the lender for any mortgage payments you can't make because you've lost the house to someone else's claim on it. The lender may also require you to buy an "owner's policy," covering your own legal fees and other losses, as yet another step toward protecting its collateral.

Even if you're not taking out a loan from an institutional lender, you should still buy an owner's policy. No title search, no matter how complete, can predict when a long-lost relative will turn up or whether paperwork buried for years under a misspelled name will reveal a claim concerning the property.

Why Buyers of Newly Built Houses Need Title Insurance

If you're the first owner of a newly built house, you still need title insurance. Someone owned the land your new house will sit on, and what's more, if your own developer fails to pay its subcontractors or suppliers, they can file liens against your property.

You may, however, qualify for a discount if your developer previously bought title insurance on the land. The title insurer may also ask that your developer sign an affidavit stating no knowledge of judgments or liens attached to your property and that all people who supplied labor or materials for the house have been paid in full.

What's Excluded From Your Title Insurance Policy

Any issues revealed by the title search that can't be wiped out will be listed as exclusions in the preliminary report-and ultimately within the title insurance policy itself. If you aren't happy about what's going to be excluded, you can cancel the sale. Some issues won't be worth the fuss, however, such as easements allowing your local power company to come check your meter.

One of the most important limitations on coverage concerns future events. Once the policy's effective date is established, anything you do to cloud your property's title-for example, failing to pay your mortgage or a contractor who then files a lien-is considered your own problem. Your title insurance policy covers you only for events that arose before you bought the house.

You'll also find some standard, boilerplate exclusions in your title insurance policy, such as for boundary line disputes, unrecorded easements, taxes, special assessments and mechanic's liens, and mineral and water rights. You'll need to decide (probably with input from your lender) whether to buy extra coverage (endorsements) for these items if it's available. Lenders often require you to buy endorsements against unrecorded easements and liens, defects that might be found only by an inspection or survey of the property (which your title insurance company won't do), mining claims and water rights, and rights of people currently living on the property (for example, if you're buying a duplex with rental tenants).

Is That Tree on Your Side or Ours?

One of the biggest sources of homeowner angst is figuring out where your property ends and the neighbors' property begins. Bad news here: Your title insurance policy won't help forestall such boundary line disputes. Most policies include a basic plat map, but it's nothing you can draw a precise line by (although if it's clearly wrong, your title insurance will cover you). If you want certainty, call in a professional surveyor, who can put in markers denoting the exact boundaries. Many lenders insist on having such surveys done.Unfortunately, surveyors' fees can run into the thousands of dollars, so it's best to figure out preclosing whether any boundary issues might exist. Start by asking the seller whether past disagreements have arisen with the neighbors over property lines, trees, driveways, and the like. Also, review the report, especially the plat map, and take a look around the property. Note any lines that don't seem to match the map, as well as oddly placed fences, large trees that seem to straddle both properties, and neighbors' cars or possessions on your side of the supposed line. If you find any of these, ask the seller to pitch in for the survey. You can save money by asking the seller whether a previous survey was done and getting it updated. For more information, see Neighbor Law: Fences, Trees, Boundaries & Noise Neighbor Law: Fences, Trees, Boundaries & Noise, by Cora Jordan and Emily Doskow (Nolo).

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Get some additional coverage for free. According to attorney Fred Steingold, some title companies are willing to issue an owner's policy "without the standard exceptions," giving you coverage against boundary encroachments and construction liens. In return, the seller must sign an affidavit stating that there's been no construction recently that wasn't paid for, and you must provide a report from a surveyor-which your lender may order, anyway. According to attorney Fred Steingold, some title companies are willing to issue an owner's policy "without the standard exceptions," giving you coverage against boundary encroachments and construction liens. In return, the seller must sign an affidavit stating that there's been no construction recently that wasn't paid for, and you must provide a report from a surveyor-which your lender may order, anyway.

Yours, Mine, or Ours? What to Say on the Deed