Buying a Home in Georgia
The purchase of your home will probably be the largest investment that you will ever make. It is a process that involves interaction with sellers, Realtors, lenders, attorneys and other service providers. During that process you will be called upon to make decisions that will affect you legally and financially. The purpose of this article is to provide you with certain general information about the purchase and ownership of a home. It is not intended to offer you advice on any specific area of concern.
Each heading slides to reveal information.
This document establishes your rights and obligations and also provides for penalties for non-performance or default. In Georgia, a contract for the purchase and sale of real property must be in writing to be enforceable. There is no one standard contract form in this state, but the most widely used form is one published by the Georgia Association of Realtors. No matter which preprinted, fill-in-the-blank form you use, it should address at least the following concerns:
- a complete legal description of the property
- the purchase price and a clear statement of how it will be paid
- a statement of who holds the earnest money and under what conditions it will be disbursed
- date of closing and delivery of possession
- who pays closing costs * proration statement for property taxes, homeowner association dues
- requirement that seller convey good and marketable title subject only to certain standard exceptions
- requirement that seller provide a termite inspection showing no active infestation
- a clear statement of what remains with the property and what the seller intends to remove
- seller's property disclosure statement
In addition to the above considerations are items known as contingencies. A contingency creates the right to terminate the contract, with no penalty and with full refund of earnest money, upon the happening or non-happening of a specified event. The most common contingencies are loan approval, inspection and appraisal, but could be anything that would affect your decision to buy the property. As an example, suppose that you only wanted to buy a house where you could put a swimming pool in the backyard. The survey that you had done revealed that a sewer pipe crossed the backyard, making it impossible to place the pool there. If you had not inserted a contingency in the contract allowing you to terminate under this set of circumstances, you would be required to complete the purchase. Regardless of which contract you use, there are many provisions that may have to be modified or deleted to meet the requirements of the particular situation. Once you sign he contract you have obligated yourself to perform and assumed certain liabilities for non-performance. GRECAA recommend that you consult with a real estate attorney for guidance in reviewing you contract to ensure that your interests are protected.
One of the obligations of a property owner is the payment of state and county real property ad valorem taxes. The county tax assessor is responsible for determining the value of the property. The taxes are levied or assessed on 40% of the appraised value of the property. Properties are appraised periodically by the tax assessor. The tax value is based upon the value of the property as of January 1 of the year in which it is valued. Therefore, if you are purchasing a new home, but you close late in the year, the taxes for that year will likely be based on acreage, a vacant subdivided lot or a partially complete home. The taxes will not reflect the full value of a complete home until the following year.
The county tax commissioner is responsible for billing and collecting the taxes. The tax bills are calculated by taking the 40% of the assessed value, minus any applicable exemptions, and multiplying it by the millage rate for the county. There are various exemptions for which the property owner can apply which reduce the tax bill. The most common exemption is the homestead exemption. The amount of the homestead exemption varies from county to county, but ranges from $2,000 to $15,000. This can translate into a savings of several hundreds of dollars on a residential property tax bill. In order to file for the homestead exemption, the property owner must own and occupy the property as of January 1 of the following calendar year. The deadline and required documents for filing a homestead exemption also vary from county to county, but the deadline is usually May 1 or June 1. You should check with the tax commissioner in your county for the exact deadline and required documents.
Most lenders on conventional, FHA and VA loans require that the borrower establish an escrow account out of which property taxes, homeowners insurance and mortgage insurance are paid. An escrow account (sometimes called an impound account) is a separate account which the lender administers on behalf of the borrower to collect and pay for taxes and insurance, and if so required, private mortgage insurance (PMI). The purpose of the escrow account is for the lender to assure itself that the taxes and insurance on the property are paid. The escrow account is usually set up at closing. The lender (or the closing attorney) obtains or estimates the annual amounts for property taxes and homeowners insurance on the property. These amounts are then divided by 12 to equal a monthly amount. The monthly amounts fro taxes and insurance (and PMI, if required) are placed in a separate account. Additionally, at closing the lender will collect certain amounts up front which are deposited into the escrow account.
Typically, the lender collects 2 to 3 months of homeowners insurance and several months of property taxes, which are the initial deposits into the escrow. The amounts collected at closing, together with the monthly payments, provide the lender with enough money in the account to pay the taxes and insurance as they become due. The lender is also allowed to keep a reserve of up to 2 months of taxes and insurance in the account in case there is an increase in the taxes or insurance. The lender can keep any interest earned on the escrow balance to cover its administrative costs. Lenders are required to analyze the account at least annually and refund to the borrower any surplus. Finally, lenders will occasionally waive the escrow account if the borrower makes a down payment of 20% or more, but may charge a fee to the borrower to do so.
There are several ways to acquire or hold title to property in this state. The two most common are described as follows:
- Tenancy in Common: This deed conveys title with no mention as to what would happen if one of the title holders were to die. The result is that if a title holder dies, his or her interest passes directly to his or her estate. At that point, the surviving title holder could not convey or borrower money against the interest of the deceased holder without first acquiring title from the estate. This could involve probating the will of the deceased or, if there is no will, filing for administration of the estate and dealing with Georgia laws of descent.
- Joint Tenancy with Rights of Survivorship: This deed conveys title to two or more people and by reference to the Georgia statute provides that, upon the death of the first joint tenant, title to that person's interest passes immediately and automatically to the surviving joint tenant. This process does not require any court action. The surviving joint tenant will be required to provide proof of death when he or she conveys or encumbers the property. The choice of which deed to use may be governed by other factors such as children by a previous marriage or unequal contribution of down payment by the owners.
Community associations have become popular because they are controlled living environments where owners often share in the use of common recreational amenities and are subject to covenants designed to promote harmony and protect property values. Two primary functions of the community associations are to maintain and operate these facilities and to enforce the protective covenants.
Community associations are governed by protective covenants which are recorded in the county deed records and are generally binding to all owners who purchase property within the community after the covenants are recorded. Owners of property subject to protective covenants may give up certain rights to maintain an attractive community and to protect property values in the community. For example, covenants often regulate the changes which may be made to the exterior of a home or yard, the type of vehicles and pets which are permitted in the community, and whether businesses may be operated from a home. Covenants may also create a duty to pay assessments or dues to a homeowner association.
While there are a number of names used to classify communities, including homeowner associations, fee simple townhomes, planned unit developments, condominiums and housing cooperatives, residential community associations with mandatory membership can be classified as either homeowner associations or condominiums.
Homeowner association (commonly referred to as 'HOA') is a broad term used to refer to mandatory membership planned communities. Typically organized as corporations, they serve essentially governmental functions. After the developer turns over control of the association to the homeowners, they elect their own board of directors. The HOA has the assessment power to raise money for the maintenance of recreational facilities and the operation of the community. The HOA also has enforcement rights of the protective covenants which exist through the power to levy monetary fines or to seek court intervention to ensure compliance. In an HOA, the recreational areas and amenities and other common property for the use and enjoyment of all the lot owners are referred to as the common area. A homeowner association generally holods legal title to the common area.
A condominium is a form or property ownership in which people own their individual units in fee simple, together with an undivided ownership interest in certain common property referred to as common elements. The condominium form of ownership can exist in all types of housing. A condominium is different from an HOA in that a unit is defined in terms of a cube of air space with both vertical and horizontal boundaries, often being the walls, floors and ceilings of a particular space. This enables the identification and description of a space located above another space, such as stacked units, where the boundaries of the units cannot be defined by references on the land. The common elements in a typical residential condominium include building exteriors, grounds and recreational facilities. A limited common element is a portion of the common elements reserved for the use of the owners of one or more, but less than all, of the units. Limited common elements often consist of such things as balconies, patios, entrance stoops, or parking spaces.
In Georgia, a condominium can only be created pursuant to state statute. When a person buys a condominium unit, he or she automatically becomes a mandatory member of a condominium association consisting of all the unit owners, and is bound by certain legal documents, including a declaration of condominium and the bylaws of the condominium association. Condominium associations have the power to collect regular and special assessments, to adopt and enforce rules regarding the use of the unit and common elements, to establish and collect fines for the violation of covenants, to institute legal action to enforce the covenants, and to approve changes or alterations to the exterior of the units.
In new condominiums, the Georgia Condominium Act requires the developer to provide purchasers a disclosure package, which includes copies of the governing legal documents, a proposed operating budget for the condominium, and a statement regarding management, operation and future development of the condominium. The Condominium Act also gives the first purchaser of the condominium unit seven days to rescind any contract to buy a unit after this disclosure package is provided.
When purchasing a property that is subject to covenants, you are strongly encouraged to request and review the legal documents for the community to determine the type of community in which you are buying and to become familiar with the community regulations on your use of the property.
A survey is an examination of your property designed to determine the boundaries and size of the property and to show the location of any improvements thereon. The result of the survey is a plat. The plat should disclose a) all building setback lines required by local zoning or subdivision restrictions and whether your house violates these lines; b) the location of any easements crossing your property and any encroachments upon the easements; and c) any encroachment over your property line by any improvement constructed on adjoining property or on your property. There are also specialty surveys that you can have performed to show topography and water flow across your property, the elevation of any structures on your property compared to the maximum 100-year flood zone, and the location of any septic and drain lines.
If you do not have a survey prepared, you may be unaware of any encroachment or violation that currently exists on your property. You also cannot be certain that any improvement you might want to place on the property (swimming pool, fence, deck) can be placed without violating setback lines, easements or even your own property line. If you purchase a policy of owner's title insurance without a survey, the policy will exclude coverage for anything that a survey would have disclosed.
In preparing for your closing, you should anticipate that there will be certain standard information and documentation that you will need to provide to your closing attorney either prior to or at the time of your closing. If you are the purchaser in the transaction, you should expect to provide the following:
All mortgage lenders require that you provide at closing evidence that you have obtained homeowners insurance on the property that you are acquiring. You will need to provide an original declarations page which shows that coverage is in effect for one year from the fate of closing, that the coverage limits for the insured dwelling equal or exceed the amount of your mortgage loan, and that your lender is properly identified as the loss payee under the policy. You will also need to provide a paid receipt for the first year's premium or an invoice for this premium that can be paid at closing. If you have any questions about whether the documentation that you have received from your insurance agent will suffice to satisfy the requirements of your lender, you should provide your insurance documentation to your closing attorney prior to closing for his or her review. Keep in mind that copies of this documentation are generally not acceptable for purposes of your closing, and that failure to provide the required original documentation can sometimes delay the completion of the closing.
Lender-required underwriting conditions
Your mortgage lender may require you to provide, at or prior to closing, documentation that the lender needs to complete the approval of your loan application. Common examples of these are a copy of a settlement statement confirming the sale of a previous residence, letters of explanation from you regarding information that may have been included in your credit report, copies of bank statements or pay stubs that you may have received since the time of your loan application, and original gift letters confirming that a portion of your down payment was a gift from an immediate relative. It is usually a good idea to contact your mortgage lender the day prior to your closing and inquire if there is any further documentation that you will need to provide at closing.
Funds required for closing
The portion of your down payment that you need for your closing will have to be delivered to the closing attorney in the form of a wire transfer of funds. It is frequently difficult for the closing attorney to provide in advance the exact amount that you will need for your closing. If you are unable to get an exact figure prior to closing, it will usually be acceptable for you to obtain certified funds in the amount that your lender has estimated for you in your Good Faith Estimate of Settlement Costs. While most closing attorneys will accept personal checks for limited amounts (usually $500-$1,000), you may want to obtain your certified check in an amount in excess of what you expect to need, and the closing attorney can refund the excess funds from the closing.
This is your promise to repay the debt. The note will reflect the loan amount, maturity date, interest rate, and monthly principal and interest payment. The note will also show the late fee and the existence of any prepayment penalty, and state whether or not it is assumable. The note, which represents your personal promise to repay the debt, and the security deed conveying your property as security for that promise, are the two most important documents that you will sign at closing.
This is the instrument by which you convey to the lender the real property that is the collateral for the mortgage loan. In some instances there will be standard riders which will attach to and become a part of the Security Deed for loans secured by condominiums, property in subdivisions with mandatory homeowners associations, or property being acquired for investment purposes rather than for owner occupancy. Also attached to and becoming part of the Security Deed will be a Waiver of Borrower's Rights in which you acknowledge that Georgia is a non-judicial foreclosure state and waive your rights to a court procedure if you default on the loan.
IRS Form W-9
This is the form used by the lender to verify the borrower's Social Security number for purposes of reporting to the IRS interest received by the lender.
IRS Form 4506
This is a form authorizing the lender to request from the IRS a copy of the borrower's income tax returns for up to four years prior to the closing. This authorization is valid for only ninety days from the date of its execution.
Errors and Omissions/Compliance Agreement
This is the borrower's agreement to cooperate with the lender in correcting any clerical errors and mistakes appearing in the loan documentation.
Affidavit of Occupancy
This is the borrower's sworn statement that he or she intends to occupy the property as his or her principal residence.
This is an affidavit that includes various forms of the borrower's name that may appear in the borrower's credit report. This usually involves a shortened form of the borrower's name, or the use or omission of a middle name or initial.
Borrower's Certification and Authorization
This is the borrower's certification that all information provided to the lender in processing the loan was true and correct, and authorizing the lender to verify after closing the credit information that the lender has accumulated.
Loan Servicing Transfer Disclosure
This is documentation required by federal regulations that discloses to the borrower information regarding the lender's intentions and recent history in transferring servicing of their loans. Lenders are required to notify borrowers any time the servicing of their loan is transferred. This transfer generally has no impact on the borrower other than to change the name of the institution that receives the monthly mortgage payment.
Flood Zone Documentation
This is documentation disclosing to the borrower whether or not the property being purchased is within a federally designated special flood hazard area. There is also usually an agreement wherein the borrower agrees that, even if the property is not located within a flood hazard area as of the time of closing, the lender can require the borrower to obtain flood insurance at any time during the life of the loan if the flood hazard maps are redrawn and the subject property subsequently lies within a federally designated flood hazard area.
Other Required Documents
While most of the documentation to be signed at the closing is lender-required forms that the borrower signs, there are a few documents that the seller will sign regarding the transfer of the property to the purchaser. The following are examples of documents that the seller will sign in a typical real estate closing:
This is the instrument that transfers the property title from the seller to the purchaser. In a general warranty deed, the seller covenants that he has the right to convey the property, that it is conveyed free and clear of all encumbrances, and that the seller will defend the purchaser from all claims against title. Note that some contracts allow the seller to convey title by a limited or special warranty deed. This form of deed limits the seller's warranty of title to those matters created or arising out of the seller.
This is the affidavit of the seller that the property is being conveyed free and clear of any liens, claims or judgments, that there has been no work done to the property that has not been paid for, and that there are no tenants in possession of the property.
Seller's Affidavit of Residence
This verifies that the seller is a Georgia resident and is not subject to the State of Georgia capital gains tax withholding requirements.
Seller's Certificate of Exemption
This is used in conjunction with the previous form when the seller is an out-of-state resident. It verifies the seller's exemption from State of Georgia capital gains tax withholding.
A title insurance policy covers or protects the owner of the policy against claims involving ownership of the property, liens against the property and marketability of the property. There are two types of policies: lender's, or mortgagee, and owner's. All lenders require title insurance for the amount of the loan to protect them against the above claims. In Georgia, unlike some states, a seller is not required to provide an owner's title policy to the purchaser.
A lender's title policy is written in the lender's name and protects only the lender. If there is a successful claim against the title, even up to a total failure of title, the lender will be fully reimbursed by the title company. The buyer is still liable for the payment of the loan, and of course buyer's equity is not insured. An owner's policy of title insurance offers complete protection for the buyer against claim or loss, including attorney's fees and court costs.
As with any insurance policy, it is very important to understand the exclusions, or what the policy does not cover. An owner's policy insures against claim or loss arising from something that happened or did not happen prior to the recording of the deed that is insured (for an owner's title policy, the recording of the warranty deed into the buyer). An owner's policy does not cover anything existing against the buyer when he or she takes title, such as federal tax liens or other judgments, nor does it protect against anything that may attach to the property through the buyer after the buyer takes title. The policy does not protect against the reassessment of current or past property taxes. If the buyer did not have a survey prepared for the purchase or the property, the owner's policy will specifically exclude coverage for any condition that such a survey would have disclosed. An owner's policy also will not protect against non-title matters such as zoning or local government regulations.
Title insurance is written by the closing attorney as an agent for the title insurance company. Effective 2009, title insurance premium rates for each title insurance company are filed with the State of Georgia's Insurance Commissioner's office. The best time to purchase owner's title insurance is at the closing because the title, tax and lien search has already been done. GRECAA recommends that all buyers purchase both owner's title insurance and a survey in connection with the purchase of a house.
All lenders require borrowers to pay a premium for private mortgage insurance if the borrower's down payment is less than twenty percent of the purchase price of the property. The purpose of this policy is to ensure the lender that it will not suffer any loss in the event that the borrower defaults on the mortgage loan and the lender is required to foreclose on the property. The closing documentation will usually include forms in which the borrower acknowledges that the lender will maintain the private mortgage insurance on the loan and that the borrower will pay the premium for this insurance on a monthly basis, and that there will be no refund of any unused portion of the premium at the time that the loan is paid off.