Buying a House? A Quick Look at Legal Issues You Should Consider

Part of a monthly multi-part series of discussions aimed at explaining legal and financial considerations for young professionals as they establish and develop their careers, relationships and lives.

The decision to purchase a home may be one of the biggest financial decisions you will ever make. Chances are, you will be looking at two or three times your annual income in debt, a small forest’s worth of paperwork, and a host of terms and phrases you may not be familiar with. Unfortunately, a misstep or two in your purchase can have serious ramifications on both your home and your investment. This discussion sets forth several legal considerations to keep in mind before you sign the contract.

How Should I Take Title to the Property?

This choice can be pretty easy when you are single – you purchase it and title yourself as the sole owner. The property is yours (subject to the mortgage) and you are free to sell it as you please or have it pass pursuant to estate plan.

However, if you are married or purchase the property with a friend or investor, you will need to title the property differently and different titles may be more appropriate for different marital and financial relationships. For example, a joint tenancy with right of survivorship may be ideal for family situations in which an older family member wants the property to automatically pass to a younger sibling upon death. A tenancy by the entirety, reserved for married couples, can prevent one of the spouse’s individual creditors from reaching the property. Where business partners are purchasing a property, it may be wise to hold title as tenants in common which would allow either partner to freely sell his/her interest in the property without the permission of the partner.

The Basement Is Dry, The Roof Does Not Leak: Seller Representations

Most states require the seller to disclose to you “material” facts which may affect your decision to buy the property. What is “material” may vary from state to state, but typical items for disclosure and warranty address termite or water damage as well as issues relating to appliances, the roof, and sewage systems. Should the seller misrepresent the extent of a known problem or fail to disclose something known to them, you may have a cause of action against the seller for any damages caused thereby. It is important to note, however, that the seller’s disclosure typically only covers known issues. For this reason, it is still strongly suggested that you obtain your own independent property inspection.

What About Title Insurance?

Another issue to consider is title insurance. When you purchase a house you may be purchasing more (and maybe less) than the house and land you actually see. Your property is likely encumbered. In other words, third parties may have rights to your land, which in some cases are actually superior to yours and restricts your ability to use your land in certain ways. In some cases, the encumbrance or restriction can be minor, such as a minimum set-back ordinance preventing you from building up to your property line. Others may be more severe. Utility easements can prevent you from installing that dream pool. An errant legal description can disclose your brand new fence is actually on your neighbor’s property. You can protect yourself against these surprises by obtaining a policy for title insurance along with the appropriate endorsements to the policy.

Title insurance aims to protect against these issues by searching the property’s title history to disclose what rights others may have with respect to the property. Additionally, title insurance insures against any additional “defects” which were not found in the title search and not otherwise excepted/excluded under the policy. In some cases, depending on the policy, title insurance can pay off your mortgage in the event a defect causes you to lose the property.

A Note on Foreclosure

Foreclosure may be the last thing on your mind as you prepare to purchase a house, but in these unfortunate times, it may be wise to consider it and what it may mean should your property be foreclosed upon.

First, it is important to realize that in some states the seizure and sale of your house may not end the bank or lender’s ability to seek further money from you. Known as deficiency judgments, in some states a bank or lender may be entitled to recoup from you the remaining balance of your mortgage (minus the foreclosure sale proceeds) even after the bank/lender takes the property.

Second, keep in mind that a foreclosure will stay on your credit history for years. Your credit score will be severely affected. This will influence your ability to purchase larger items, such as a vehicle, where financing is necessary or may even affect your ability to become approved to rent an apartment.

Next Month’s Topic: The Law and Your Job