Buying a House in Rhode Island

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

As of May 1, 2008, real estate agents in Rhode Island are presumed to be neutral facilitators in a real estate sales transaction, which means that they can assist both the seller and the buyer in a sale, and that they are required to be neutral where there are conflicting interests between the parties. Real estate agents can also act as "a designated client representative" for a seller or a buyer, as long as requirements are met that the representation contract must be in writing and contain terms concerning compensation, services to be provided and limitations on services.

Mandatory disclosures and consent forms regarding the role of real estate agents are also required under state law, which ensures that both the seller and buyer are informed as to the roles and responsibilities of the real estate agents with whom they will be dealing with during the sales process. If you enter into a client representation contract with a real estate agent, the agent has a "fiduciary duty" to you, which means that the agent owes certain duties to you under the law including:

• Performing the terms of the contract with reasonable skill and care
• Promoting your best interest in good faith and honesty
• Confidentiality
• Performing tasks related to the sale in a timely manner
• Accounting for money and property received during the sales process

If a real estate agent is assisting you in a sale as neutral transaction facilitator, he will not be able to fulfill all the fiduciary duties owed to a client under a client representation contract, but he does have the following duties:

• Performing tasks related to the sale in a timely and competent manner
• Acting with honesty, good faith, reasonable skill, and care
• Accounting for money and property received in the course of the sale
• To protect confidential information of both parties to a sale

When selling a house, disclosure of all important facts actually known to the seller is critical, even though it may impact on the ability to complete the sales transaction or on the ultimate sales price of the house. Under Rhode Island law, a seller must complete a disclosure form and give it to the buyer before an offer to purchase the property is made.

A seller should disclose the following potential house defects and information:

• Plumbing and sewage problems
• Water leakage of any type, including in basements
• Termites or other infestations
• Roof age, layers and defects
• Heating or air conditioning system or electrical system problems
• Property drainage problems
• Structural problems
• Problems with title to the property or zoning issues
• Substantial additions or alterations made without a building permit
• Hazardous materials
• Asbestos or radon
• Mold problems
• Lead paint (required under the federal Residential Lead-Based Paint Hazard Reduction Act of 1992 for homes built prior to 1978)
• Any other problems

Purchase Agreements

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

• The names and addresses of the sellers and purchasers
• The purchase price and how it is to be paid, including any down payment or earnest money deposit
• Arrangements for financing
• The legal description of the property
• A provision that title to the property shall be good and marketable of record, subject to reasonable easements
• The condition of the property at the time of closing
• Whether a survey and appraisal are to be made and, if so, at whose expense
• All expenses to be divided between the seller and purchaser
• The method of handling any escrow account containing reserves for payment of taxes and insurance held by the seller's mortgage company
• Seller's statement of the condition of the property
• Closing date and possession
• Statement of the closing costs
• That all closing documents must be acceptable to purchaser's attorney
• Provision as to who bears the risk of loss if the property should be damaged prior to the closing date
• Name of sales agent and any commission due
• Signatures of parties

An important thing to remember is that you should consult your Rhode Island real estate attorney before you sign the contract. The real estate transactions involved in purchasing a home give rise to a number of legal questions that a lawyer 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. You can make your offer contingent on inspection.

Every inspection should include an evaluation of at least the following:

• Foundation
• Plumbing and electrical systems
• Doors
• Ceilings, walls and floors
• Roof
• Hazardous materials concerns
• Heating and air conditioning systems
• Common areas (in condominiums)
• Insulation
• Ventilation

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

You can report any problems with a home inspection service through the Rhode Island Contractors' Registration Board Web site.

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 Rhode Island, 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 Rhode Island, liens on a piece of property may include:

• Mortgages
• Land sale contracts
• Involuntary liens (includes workmen's liens, liens for unpaid taxes and liens filed by creditors holding judgments against the owner)

Closing Costs

In Rhode Island, you can expect the following charges-called "closing costs" - at the time you purchase your home:

• Down payment
• Private mortgage insurance
• Loan discount points
• Loan origination fee
• Underwriting fee
• Processing fee
• Administration fee
• Appraisal fee
• Credit report fee
• Tax service fee
• Flood certification fee
• Document preparation fee
• Settlement or closing fee
• Transfer taxes
• Title search
• Title insurance
• Recording fee
• Inspection fees
• Survey of property
• Hazard insurance reserve
• Prepaid interest
• Tax impounds
• Escrow fee
• Lender attorney fees

Many times buyers and sellers may negotiate who pays which costs as part of the final terms of the purchase and sale agreement.

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 an unexpected fee that 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. To learn more about RESPA visit the Real Estate Settlement Procedures Act Web site.

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 Rhode Island, the document you sign as a security interest in your house is called a "mortgage." A mortgage is the instrument, usually held by the lender, by which the property is named as collateral to secure the payment of a debt or obligation. Under the terms of the mortgage, the lender can seek the foreclosure sale of your house to pay off your loan if you fail to make your loan payments. Because mortgage terms and rates may vary from lender to lender, it's a good idea to shop around and get the best possible deal.

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 does not bring enough money to pay off your mortgage plus the cost of 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.