Buying a House in Minnesota

Buying a house is one of the most important legal transactions you'll ever undertake. It's important to know your legal rights and understand the process.

Working With a Real Estate Agent

In Minnesota, real estate agents may represent sellers, buyers, or act as dual agents, representing both parties in a sale. Real estate agents have what's called a "fiduciary duty" to the party who they are representing in this case, the buyer. This means that the agents are held by law to owe specific duties to the buyer. In addition to duties or obligations that are stated in a buyer's representation contract, a listing agreement or other contract, a fiduciary's duties include:

• Loyalty
• Obedience
• Disclosure
• Confidentiality
• Reasonable Care
• Accounting

You may want to hire a buyer's agent, which is someone that will act on your behalf. The sales commission is then split between the seller's and buyer's agent.

Under Minnesota law, a seller is required to make a written disclosure to a prospective buyer prior to signing an agreement to sell or transfer residential real property. It must include all "material facts" or substantial information about negative physical conditions of which the seller is aware that could adversely and significantly affect an ordinary purchaser's use and enjoyment of the property or any intended use of the property of which the seller is aware. A material fact is a fact that may play a part in a buyer or seller's decision-making process.

The disclosure must be made in good faith and based on the best of the seller's knowledge at the time of the disclosure. The disclosure is not a warranty or a guaranty by the seller. A seller should disclose the following potential house defects:

• Plumbing and sewage problems
• Water leakage of any type, including in basements
• Termites or other insect infestations
• Roof defects or structural problems
• Heating or air conditioning system and electrical system problems
• Property drainage problems
• Foundation instabilities or cracks
• Problems with title to the property
• Lead paint (required under the federal Residential Lead-Based Paint Hazard Reduction Act of 1992) or other environmental problems such as asbestos, radon gas, or fuel tanks located on the property

Purchase Agreements

When you find a house you'd like to buy, you'll put together and sign a purchase and sale agreement. The purchase agreement should contain all of the terms of the sale, including the following:

• The purchase price
• Arrangements for financing
• The legal description of the property
• Good and marketable title furnished by the seller as indicated by an abstract of title or a registered property abstract
• The condition of the property at the time of sale
• Date of closing and date of possession
• Earnest money amount, down payment amount and type of mortgage
• Whether you will have a professional inspection and if you can cancel the agreement if you do not like the inspection
• Any contingencies (conditions) on the agreement
• Who will pay the property taxes
• Warranties of title
• Date of transfer of possession
• Proration of utility bills and property taxes
• Party responsible for risk of fire or other hazard pending closing or transfer of possession
• Itemization of personal property and fixtures included in the sale
• Basic terms of any escrow agreement
• Provision for return of earnest money if the sale is not complete
• Signatures of the parties

An important thing to remember is that you should consult your attorney before you sign the contract. The transactions involved in purchasing a home give rise to a number of legal questions that a Minnesota real estate attorney with a real estate background and experience is best equipped to answer.

Inspection

It's always a good idea to hire an independent professional home inspection service before you buy a house. A home inspection is a visual examination of some combination of the structural, mechanical, electrical and plumbing systems that is designed to identify material defects in those systems and components. A material defect is a defect that is apparent and may be sizable enough to affect your decision to purchase a home. You can make your offer contingent on inspection.

Home inspections assist buyers and inform seller of defects in the property. An inspection generally covers the following:

• Exterior and roof
• Structure
• Electrical
• Heating
• Air conditioning and heat pumps
• Plumbing
• Cooling
• Insulation and ventilation
• Interior

Most inspectors will charge extra for services such as radon testing, termite inspections and well or septic inspections.

Legal Title Issues

When a home is purchased, title insurance is also purchased. Based upon a search of public records, a title search brings attention to any known property title problems before the closing takes place. It also insures against loss due to certain title defects that didn't turn up during the title search. Your real estate lawyer or title company will investigate the legal title of the property you want to buy, and may find issues you'll need to understand.

In Minnesota, for example, an implied easement exists where a person grants lands to which there is no accessible right-of-way except over her or his land or retains land that is inaccessible except over the land which the person conveys. In such instances a right-of-way is presumed to have been granted or reserved. Such an implied grant or easement in lands or estates exists where there is no other reasonable and practicable way of accessing the property, and it is reasonably necessary for the beneficial use or enjoyment of the part granted or reserved.

The property you're interested in may also be subject to a "lien," which is a charge on the property to satisfy a debt or other obligation owed by the current owner of the property. A lien encumbers property for as long as it exists and has been recorded in the public records.

In Minnesota, liens on a piece of property may include:

• Mortgages
• Construction or mechanic's liens
• Judgment liens
• Tax liens

Closing Costs

In Minnesota, you can expect to pay for the following charges -called "closing costs" - at the time you purchase your home:

• Abstract
• Down payment
• Loan origination fee
• Appraisal fee
• Credit report
• Tax service fee
• Inspection fees
• Title insurance
• Title examination fee
• Deed preparation
• Plat sketch
• Deed tax
• Hazard insurance reserve
• Recording fees
• Prepaid interest
• Mortgage insurance
• Mortgage registration tax
• Tax escrow
• Closing fee

RESPA

The US Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) administers several regulatory programs to ensure equity and efficiency in the sale of housing. One of these programs, under the Real Estate Settlement Procedures Act (RESPA), applies to almost all mortgage loans and mortgage companies, not just FHA-insured mortgages.

RESPA protects consumers by requiring a series of disclosures that prevent unethical practices by mortgage companies and that provide consumers with the information to choose the real estate settlement services most suited to their needs. RESPA helps consumers avoid surprises, like when an unexpected fee appears in your closing documents. The disclosures take place at various times throughout the settlement process. Certain disclosures are required at the time of loan application, before closing occurs, at closing, and after closing.

Mortgages

At the time of purchase, you'll sign a promissory note that legally obligates you to pay back the money you borrowed to buy your house. A promissory note is, in effect, an "IOU." You promise to pay your lender the full amount, payable in equal monthly installments, at the interest rate previously agreed upon. Your lender will keep the original until you completely pay off the loan. In Minnesota, the document you sign as a security interest in your house is called a mortgage. A mortgage is a type of contract called a security interest, and in the mortgage contract, you name your house as the collateral to secure the payment of your loan. If you default on the loan, that is, you don't make your loan payments, the lender can foreclose on the mortgage and sell your house to pay off your loan.

It's a good idea to shop around and get the best possible deal because the mortgage terms offered by lenders can vary.

Private Mortgage Insurance

If you put down less than 20% on a home mortgage, lenders often require you to have "private mortgage insurance" (PMI). PMI is a type of insurance that protects the lender in the event the borrower defaults on the loan, which is a concern if you don't have much equity in your home. PMI covers the gap if a foreclosure sale of your home might not bring enough to pay off the mortgage plus cover the foreclosure proceedings. PMI is a cost added to the monthly payment of many conventional loans. The loan servicer collects these monthly premiums and pays them to a private mortgage insurance company.

The Homeowners Protection Act of 1998 (HPA) establishes rules for automatic termination and borrower cancellation of PMI on home mortgages. Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80% of the original purchase price or appraised value.