Homeownership is the largest investment most consumers make. It is also complex, often requiring many legal documents and the involvement of many parties. Here, learn the roles of the parties involved and what to be aware of when signing paperwork.
This material is reproduced from the website of the Texas Office of the Attorney General Consumer Protection Division. It has been lightly edited for style.
Revised by TexasLawHelp.org on November 14, 2022.
What do I need to be aware of when signing paperwork to buy a home?
Be sure to read all the terms and understand the documents you sign.
The documents state the parties' responsibilities. Be aware of all payments, penalties, and other terms.
Have a realistic understanding of your finances.
Purchasing property that is out of your price range can make payments a struggle and can lead to foreclosure. If you are unsure, ask a financial professional or a counselor approved by the U.S. Department of Housing and Urban Development (HUD). HUD- approved counselors offer free or low-cost advice on home buying and other related topics.
Avoid interest rate surprises.
- Be leery of a seller or lender who is not clear about what the interest rate will be and whether the interest rate is fixed or variable.
- Offers that overly-emphasize "low monthly payments" might not show the full picture.
- Variable interest rates can increase over time. Even a couple of percentage point increase in the interest rate could add hundreds of dollars to your monthly payment, especially in the beginning when you carry a large balance.
Avoid skyrocketing payments and accumulating debt.
Some lenders offer mortgages with extremely low introductory monthly payments. The reason the payments are so low initially is because the mortgage begins with a low interest rate and your payments only cover part of the interest.
Because the unpaid interest becomes part of the mortgage itself, and the interest rate rises, your payments may double or triple.
Unless you make payments that cover the accumulating interest and pay off the principal you could find yourself in a cycle of accumulating debt without building equity.
Look out for undisclosed costs.
Taxes: Many home buyers discover months after the purchase that they owe hundreds or thousands of dollars in property taxes. Not all lenders roll property taxes into the monthly payment. Find out before closing whether the taxes will be included in the monthly payment, or if you will need to pay the taxes separately.
You can approximate the tax amount by contacting the county's appraisal district. Most counties provide tax information online. For brand new homes that do not have a tax record, contact the appraisal district about property taxes on comparable homes in the same area.
Insurance: Lenders require buyers to have homeowners' insurance. While some mortgages include homeowners’ insurance as part of the monthly payment, others require you to obtain and pay the premium separately.
Remember taxes and insurance can increase yearly, so even with a fixed interest rate your monthly payment may increase.
Never falsify income or assets on loan applications.
Avoid any lender who asks you to falsify income or assets on your loan application. Many lenders make legitimate loans based upon "stated" income (income for which you don't have any documentation). But if a loan officer suggests that you lie about your income, do not use them. You could face criminal charges for lying on a loan application.
What do real estate agents do?
Real estate agents organize real estate transactions between buyers and sellers. Real estate agents walk their clients through the entire home buying or selling process, providing valuable knowledge and information at each step. They typically receive a commission when a deal on the home closes.
Listing Agents vs. Buyer's Agents
Agents who represent sellers are also called listing agents. Agents who represent buyers are called buyer’s agents. Real estate agents can be both listing agents and buyer’s agents, but typically not for the same real estate transaction.
What do appraisers and inspectors do?
Appraisers and inspectors give you a candid assessment of the condition and value of the property. Regardless of how you pay for the home, it is important to have the home professionally appraised and inspected. These professionals should be independent of the lender or real estate agent. Be wary of anyone who insists you use "their" appraiser or inspector.
What do surveyors do?
Surveyors perform a topographic survey on the property. Surveyors can trace the legal history of the property, including property lines, platting restrictions, and zoning regulations.
What does the title company do?
The title company researches the legal status of the property and issues title insurance.
The title company ensures that the seller is the legitimate owner or representative of the property. The title company will tell you if anyone else has legal claims (liens) on the property, such as for unpaid taxes or an unpaid mortgage by a previous owner.
It is essential that you involve an independent title company, since you could be held liable for many unresolved debts by a previous owner. Do not trust a seller or agent who insists that you avoid using a title company.
You will have to pay for the title insurance, but it can often be rolled into the loan.
What do mortgage brokers do?
Some people use mortgage agents, also known as brokers, to help them find a loan. The broker does not issue the loan. Instead, the broker gets a commission once you agree to accept a loan from one of the mortgage companies they represent.
Determine whether you want to use a broker, or if you would rather contact lenders yourself.
Avoid mortgage brokers who charge hefty up-front fees and "guarantee" they will find you a loan. Make sure the broker is licensed. Avoid brokers who do not give you a fee disclosure form. Also, ask if the broker will be paid a "yield spread premium,” as this will likely increase your costs.
What does a mortgage company do?
Mortgage companies provide loans to buy real estate. Commercial banks and sometimes credit unions also issue home loans. A mortgage company or bank often "sells" the debt to another institution. This means where you pay your monthly payments can change.
What does an attorney or accountant do?
Attorneys or accountants who represent you can help conduct real estate transactions. They conduct basic document reviews and can explain the purchasing process along with your long-term rights and obligations.
Are “rent to own” arrangements legal in Texas?
Yes. Contracts for deed, sometimes referred to as "rent to own" financing arrangements, are legal in Texas.
What is the difference between a “rent to own” contract and a conventional purchase contract?
The important difference between a contract for deed and a conventional purchase contract is that under the contract for deed you generally do not gain immediate equity in the property as you make payments.
Equity is the difference between the value of the home and the amount still owed.
Under a contract for deed, the buyer only has an equity interest after they have paid 40% of the loan or more, or have made 48 monthly payments.
What else do I need to know about “rent to own” arrangements?
Generally, if the buyer provides a promissory note for the note's balance and a deed of trust, the seller must provide a warranty deed within 10 days or provide an explanation that legally justifies why the seller is not providing the warranty deed.
Contracts for deed can also have strict conditions. Some consumers with a contract for deed have lost their homes because they were a few days late on one payment. This meant that despite making timely payments for years, the contract forced them to leave the property with no stake in the investment. In some cases, the seller may not even have to bring a formal foreclosure. It is therefore critically important for you to know exactly what type of contract you are signing and to make sure you can meet all the conditions.
See Executory Contracts and Lease-to-Own Real Estate for more information.
What do I need to know when refinancing?
Consumers who refinance their home can get in over their heads by not reading the new loan's terms. Some loans advertise "low monthly payments," but have a variable interest rate which skyrockets after a few years. If you choose a loan with a variable rate, make the lender tell you what the monthly payments will be after the rate has adjusted several times.
Some unscrupulous refinancing companies may insist you use "their" appraisers, who over-value the home. If you borrow more than the home's true value, you could be stuck making large payments or forced to sell your home for less than what you paid.
Many refinancing companies offer loans with a "prepayment penalty." This means to get out of the loan within the first few years, you must pay a large sum. Ask if this is included in your loan, and try to have it removed. Loans without a prepayment penalty give you greater flexibility to sell your home or refinance it during the first few years.
How do I avoid a title scam?
Always use a title company. Some scam artists misrepresent themselves to buyers as "free and clear" home owners wishing to sell their home. If no title search is performed, they could sell you a condemned property which often carries a large tax lien. If this happens you could lose the home and your money.
Title companies ensure that the buyer is dealing with the property's legal owner or authorized agent. They also inform the buyer about debts or other legal issues associated with the property. Be sure you deal directly with the title company. Do not trust a financing company or seller who insists on acting as a go-between.
Learn more on the Loan and Mortgage Scams page and the Home Buying: Avoiding Pitfalls and Scams page, provided by Texas Office of the Attorney General Consumer Protection Division.
This article explains which types of professionals you may work with during the home buying process.
This article discusses homestead exemptions.
This article explains how foreclosure works and how to avoid losing your home.