Why have a title search? Truthfully you may be purchasing a piece of property which actually may not be yours. Liens follow the property, not the people.
Suppose I sell you a piece of property at a rock bottom price, offer to finance it for you, tell you I will do everything, and all you have to do is give me earnest money of $20,000. It’s such a bargain you hop right on, so you give me good funds for $20,000. We sign the paperwork and alas, the property is now yours. I file all the paperwork and you think I am absolutely wonderful….Until you realize when you purchased that property from me, you also purchased all the liens; they are now your responsibility.
They can be mechanic’s liens for work completed but not paid; medical liens from doctors and hospitals, judgment liens handed down by a court for accidents or other legal entanglements, back child support, internal revenue service liens, HOA liens for back dues–liens for just about anything—you have just purchased all of them and they could be hundreds of thousands of dollars.
That’s just one of the reasons you need a title report. Maybe this is a second marriage and the property was purchased during the first marriage and there are children by that marriage. These children may have claim to the property when that spouse is deceased, and the living spouse actually has nothing.
Perhaps one spouse has died and the surviving spouse has not probated the estate. This happens frequently and the property is in the name of both spouses. A dead person cannot have claim to a property, it must be dispersed as the will deems or intestate (by the state). This must be completed before any transfer of property so that the legal owners can be found and possibly agree to the transfer.
Very often it is an investigative mission to find surviving heirs. I had a situation where the woman who was in a second marriage, wanted to sell her property. She had children by her first marriage and her first husband had died. The wife never took care of the first husband’s estate. He wanted his children to receive his portion of the property.
Immediately that means the wife receives only half of the value of the property, not the full value she anticipated. There were five children, spread all over the country. One of the children had died so his heirs were in line to inherit one fifth of one half of the proceeds of the property. We couldn’t find him and this was going to tie up the conveyance of the property. Finally we located him, and then we were able to put the property on the market. Had we a contract waiting, we probably would have lost the deal.
Good agents always check title prior to putting property on the market. Usually there is no problem, but sometimes a real estate/estate attorney needs to be called to unravel the title in a legal manner. Title insurance insures that good title is being passed to the buyer. Always read the preliminary title report and immediately take care of any red flags.
Archive for the ‘Financing’ Category
Why have a title search? Truthfully you may be purchasing a piece of property which actually may not be yours. Liens follow the property, not the people.
Before October 3, pre Consumer Financial Protection Bureau (CFPB) regulations, the title company drew up the closing disclosure statement which used to be known as the HUD-1. With the implementation of CFPB, in Arizona, it is now the responsibility of the lender to draw up the closing disclosure and get it to the escrow officer with whom the buyer and seller will “close escrow”. The real estate agent should also be present and explained the closing statement to the clients prior to close of escrow.
Lenders, under CFPB, are now required to get the closing disclosure to the parties three business days prior to the scheduled closing. It is a simpler form that the HUD-1 and spells out the loan amount, the interest rate, the monthly principal and interest and any prepayment penalty .
The projected payments show how the payment is calculated with principal, interest, mortgage insurance and estimated escrow which includes taxes and insurance. Projections are for Years 1-7 when Mortgage interest is required and then from years 8-30 or the life of the loan when mortgage insurance is no longer required. Estimated taxes and insurance are spelled out in a separate box. These are not static costs, they can rise yearly as taxes increased as well as insurance.
Closing costs are estimated and the cash to close is spelled out. The second page is a breakdown of the closing costs detailing all loan costs; loan origination fee, services the borrower did not shop for; and services the borrower shopped for.
Taxes and government fees which include recording fees are spelled out as well as all pre paids which include hazard insurance premium, mortgage insurance, prepaid interest, and tax escrow accounts on a monthly basis. The initial escrow payment at closing will include insurance, mortgage insurance if applicable, and taxes and these are computed in the closing costs needed by the borrower to close escrow. Other fees will include Homeowner’s Association fees, Real Estate commissions with the amount and to whom it is paid, and owner’s title insurance.
The third page includes a calculation of “cash to close” which includes total closing costs, anything paid out of escrow such as an appraisal, any closing costs which are financed, and the down payment, any deposit, the funds for the borrower from the loan, any seller credits or other adjustments, and then the cash to close figure is derived.
The remainder of page three is a summary of all the transactions from the previous pages, and shows the borrower’s transaction as well as the seller’s transaction so the net due seller is calculated. Any deposits, amount of the loan, and seller credits are displayed; adjustments such as taxes or HOA fees, showing as a debit or a credit for the buyer and the seller. Any mortgage payoff is shown on the seller’s side.
Page four are loan disclosures about features of the loan, whether there is a demand feature, if the loan can be assumed, what happens with a late payment, if there is negative amortization, and will the lender accept a partial payment. The escrow or impounds will be spelled out, and the estimated property taxes if the buyer declines an escrow account will be shown.
The last page shows the total amount which will be paid if the buyer holds the property for the length of the loan and makes payments as scheduled. The amount of interest paid during the life of the loan is shown as well as the amount financed. The higher the loan interest rate, the greater the amount of interest paid. The annual percentage rate is shown and is different than the interest rate for the loan. The APR includes all the funds necessary to close escrow. And then the box which will show the total interest rate percentage over the life of the loan will knock your socks off! It is the total amount of interest paid over the loan term as a percentage of the loan amount.
Contact information for the lender, the mortgage broker, the real estate broker for the buyers and seller and the settlement agent are listed with name, address, identification number, state license number, contact person and the contact identification and state license number, e mail address and phone number.
To view this form: http://files.consumerfinance.gov/f/201311_cfpb_kbyo_closing-disclosure.pdf
The manner in which a buyer takes title to a property in Arizona has legal and tax consequences.
Arizona is a community property state. Neither the real estate agent nor the escrow officer can give legal advice on how to take title. However general guidelines have been published and are reproduced here. These are definitions provided by Fidelity National Title Agency, Inc. Thank you.
COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP: Community property with right of suvivorship is a method of ownership by husband and wife that vests title in the surviving spouse upon the death of one of the spouses.
COMMUNITY PROPERTY: Arizona is a community property state. There is a statuary presumption that all property acquired by husband and wife is community property. Community property is a method of co-ownership for married persons only. Upon death of one of the spouses, the deceased spouse’s interest will pass by either a will or interstate succession.
SOLE AND SEPARATE: Real Property owned by a spouse before marriage or any acquired after marriage by gift, devise, descent, or specific intent. If a married person acquires title as sole and separate property, the spouse must execute either a disclaimer deed or quit claim deed.
JOINT TENANCY WITH RIGHT OF SURVIVORSHIP: An undivided interest in property taken by two or more joint tenants. The interest must be equal; occurring under the same conveyance, and beginning at the same time. Upon death of a joint tenant, the interest passes to the surviving joint tenant or tenants, rather than to the heirs of the deceased. If a married couple acquires title as joint tenants with right of suvivorship, they must specifically accept the joint tenancy to avoid the presumption of community property.
TENANCY IN COMMON: A method of co-ownership where parties do not have survivorship rights and each owns a specific undivided interest in the entire title.
CORPORATION: Any group of people “incorporating” by following certain statutory procedures many take title to real property in the name of the corporation.
GENERAL PARTNERSHIP: Title may be taken in the name of a general partnership duly formed under the laws of the state of the formation of the partnership. A partnership is defined as a voluntary association of two or more persons as co-owners in a business for profit.
LIMITED PARTNERSHIP: A partnership formed by two or more persons under the laws of Arizona or another state and having one or more general partners and one or more limited partners. A certificate of limited partnership must be filed in the Office of the Secretary of State, a certified copy of which must be recorded.
The purpose of an appraisal is to protect the investment of the lender’s investors. Actually the lender bundles the loans and sells them on the secondary money market and often they are resold which is why the buyer must purchase an Alta Lender’s policy which assures that the lender is always in first lien holder position. This is why you may purchase a property and the check for the loan is made out to xyz company; eight years later, you receive notice it is to be made out to 123 company and then even later, you write your check to abc company. The mortgage notes have been sold. But I digress.
If you have a loan on the property, usually you must have an appraisal. The appraisal is nothing more than an opinion of value. Hopefully that is what your Realtor® has provided you; an opinion of value substantiated by homes of similar age, quality, size and amenities within a reasonable range. The Realtor® is very aware of the fact the property has to appraise. It does no one any good to put a high price on a property, receive a contract for that high price, and then have the property not appraise.
So what happens then? One of three things. Let’s say the property is priced at $275,000. The appraisal comes in at $260,000. The buyer is putting 10% down or $27,500 and carrying a loan for $247,500. Scenario One: The buyer can come in with the additional $15,000, the difference between the $275,000 and the $260,000 and put $42,500 down. But why would a buyer pay $15,000 more for a property than it is worth?
Scenario Two: The seller can lower the price to $260,000 on the basis that the property, according to the appraiser, is not worth $275,000.
Or Scenario Three: The seller and the buyer can meet someplace in the middle and each give up something, the seller can come down $7500 and the buyer can put down an additional $7500. It’s a re negotiation.
Or the seller’s agent can “fight the appraisal” but will generally loose, especially if it is a VA appraisal.
I had a property which sold immediately for $162,000 with a VA loan. The appraisal came in at $156,000. The seller went down $2,000, the buyer came up $2,000 but there was no meeting of the minds. We cancelled the contract, and put the property back on the market but indicated we would not accept VA financing. The VA appraisal stays with the property for six months and I did not want to constrain my seller to the $156,000 appraisal.
Within 48 hour, I had another contract, also for $162,000 but with a conventional loan. The appraisal was done within a week and a half of the first appraisal, and came in at, you guessed it, $162,000. And ironically, that same first buyer came back with another back up offer but of course the second buyer closed on the property within three weeks.
The lesson to buyers is simple. If you have a property you want, be prepared if the appraisal comes in low. Your agent should give you comps to support the price you are offering. Your agent may also know how other agents price: some price high, some price on target, and some give you about 3% to negotiate – often to account for the 3% concessions buyers often request.
The lesson to sellers is equally as simple. Your agent should price the property with supporting comps in a realistic range based on properties in the neighborhood of like kind which have sold. These are the same comps the appraiser will be using. Don’t fall for the old argument, price high, you can always come down. Generally that is a recipe for not selling your home, or a series of price reductions which will net you less than the price your agent originally suggested. Remember, the property has to appraise!
The Lender must issue Loan Status Updates, otherwise known as LSUs, when requested by either the seller’s agent or the buyer’s agent. The first page of the LSU is similar to the Pre-Qualification form but is issued after mutual acceptance of the contract.
The close of escrow date is specified, the name of the buyer, the name of the seller and property address as well as Assessor’s number, and the city.
It is page two however, which tracks the progress of the loan from the reception of the contract and all addenda from the buyer’s agent. Understanding these items which the lender must fill out with the date completed and his/her initials, marking each box a yes or a no, is a journey through the loan process.
Once again, the lender must assure that he/she has the buyer’s name, income, social security number and the address of the property, as well as the estimate of value of the property and the amount of loan requested. The lender verifies that the loan estimate has been sent and the buyer indicates his/her intent to proceed with the loan.
The lender receives a signed Form 1003 (http://www.mortgagesanalyzed.com/gyan/docs/fnma-form-1003/fnma-form-1003.php) which is the loan application form as well as all of the lender disclosures.
CFPB regulations now have the appraisal being ordered almost immediately and usually prior to the home inspection. In the “olden days”, pre CFPB, the home inspection was done first and then the go ahead given to the lender to order the appraisal. Buyer’s agents should now order the home inspection upon mutual acceptance of the contract as soon as possible.
Down payment sources are identified and the lender must review the Title Commitment to make sure there is no clouded title on the property, then the lender can lock the loan program, interest rates, points, and specify when the lock expires. Once the lock expires, that interest rate is no longer guaranteed and the buyer may have to pay a higher rate which potentially could prohibit him/her from purchasing the property since the total loan amount would exceed the amount of pre-qualification.
The appraisal is received and the property must appraise for the loan amount requested. We will talk about low appraisals in another blog tomorrow. If the appraiser has requested any repairs, the list must be provided to the buyer and the buyer and buyer’s agent must acknowledge receipt. These repairs must be completed and the appraiser must go out again and ascertain that the repairs have been done as a condition before the lender can issue documents for signing. The second trip is an additional expense to the buyer. These repairs are called PTD, prior to documents conditions.
The lender package goes to the Underwriter, the silent but powerful person in the back office. It is the underwriter who makes sure the conditions of the loan have been met and issues the final decree that the buyer has loan approval without PTD conditions.
The lender now orders closing documents and completes the closing statement, formerly a task done by the closing agent. This was called the HUD-1 and is now called the Closing Disclosure Statement. The lender reviews all, making sure all prior to funding conditions have been met and then orders funds to be sent to the escrow company. The buyer and seller sign the loan documents and another property has transferred ownership.
To see the new documents, check this website:
With the October 3 implementation of the Consumer Financial Protection Bureau’s regulations governing mortgages and lending, additional requirements fall upon the lender. Serious buyer generally are pre-approved before they look at property. Most professional agents will insure their buyer has met with a lender so the buyer will not be disappointed down the line if he/she cannot qualify for the house wanted.
The Arizona Association of Realtors® Pre-Qualification Form has basic information required by the lender. This includes whether the buyer has consulted with a lender and if not, the buyer must declare he has not consulted with a lender yet by checking the appropriate box. If this is the case, chances are the seller will not take any offer submitted by the buyer very seriously, or will require that the buyer talk with a lender before considering the offer.
The lender declares his company,his/her name plus the Arizona License and NMLS number,along with the address, e mail, phone and fax numbers, signature and date. The buyer must also sign and date the Pre-Qualification form and the buyer’s legal name must appear in the first lines of the Pre-Qual form.
The lender must indicate the buyer marital position; married, unmarried, or legally separated and note whether the buyer is relying upon the sale or lease of a property in order to qualify for the loan, and/or whether the buyer is relying upon seller concessions to close the loan.
The type of loan and whether it is a loan a primary or secondary residence, or a non-owner occupied residence such as a rental is necessary plus the type of property; Single Family Residence, Condo, Townhome, Manufactured Home, or Mobile Home.
The lender must provide any FHA loan buyer with the pamphlet, “For Your Protection: Get a Home Inspection” as well as discussing assets, liabilities, and income, then obtaine a Tri-Merged Residential Credit Report.
After these discussions, the lender will calculate how much loan the buyer can pre-qualify, and make an assumption of the monthly principal and interest plus mortgage insurance, property taxes, insurance, HOA due, and flood insurance. The lender will stipulate that the monthly loan amount not exceed x dollars with an interest rate not to exceed a specified percentage and must indicate whethert the interest rate is fixed, adjustable, and if there is a pre-payment penalty.
The buyer will have to provide specific documentation and the lender will check off if this documentation has been received. Buyers should bring to the lender, the last two paystubs, W-2 forms, tax returns for the past two years, corporate tax returns if applicable, documentation of the down payment and any reserves required, documentation for all sources of gift funds, documentation of credit and liability, and any other paperwork the lender may require.
Once this is done, the lender will provide a loan status update to the Seller and the brokers within ten days of mutual acceptance of the contract.
The buyer should have been pre-approved by a lender in order to purchase a property. There is a difference between being pre-qualified and being pre-approved. To be pre-qualified means that according to what you have told the lender, he believes you can purchase the property for whatever sum. Being pre-approved means the lender has checked the assets and liabilities and feels that the buyer can afford to own this property…the buyer is “good to go”. The buyer wants to be pre approved.
But a pre-qualification form should accompany every offer. However all offers using the AAR Contract are contingent upon loan approval, if the buyer suddenly cannot qualify for any reason, he/she is out of the contract, and if the property does not appraise, the loan cannot usually be granted and the buyer is out of the contract. Earnest money will be returned to the buyer.
If the lender has “Prior to Document” conditions on the loan, then the specified conditions must be met prior to documents being issued by the lender. For example, a termite treatment may be required by a lender for a VA loan. Documents cannot be issued and therefore the loan documents will not be issued, nor the loan funded without this condition being met. (A loan cannot fund without the signatures of the buyers.)
If the buyer had been offered an interest rate but failed to lock the rate because he/she thought the rate would go down, this is not sufficient reason for the contract to be cancelled. Failure to have the necessary funds to close escrow is likewise, not a reason for the contract to be cancelled.
The buyer must provide the lender the name of the buyer, social security number, address of the property to be purchased, buyer’s income , estimated value of the property, and the amount of the loan requested. The buyer grants the lender permission to obtain a tri-merged credit report.
The Loan Status Update must be delivered to the seller with appropriate information describing the current status of the loan. The update must be provided by the lender when requested by the seller.
The buyer will sign all loan documents no later than three days prior to the Close of Escrow date.
The financing portion of the contract indicates the type of loan, and if there is a change, all parties and the escrow company must be notified. The buyer pays all loan costs unless otherwise indicated, and if concession from the seller to the buyer are a part of the contract, this must be spelled out. If the loan is a VA loan, certain fees cannot be paid by the veteran and must be paid by the seller. The appraisal fees which are to be paid, is designated either paid by the seller or by the buyer.
These provisions also act as instructions to the lender and the title company and permit the seller to know the details of the loan. Both the buyer’s agent and the seller’s agent will monitor the loan process to make sure all time frames are being met.
The Arizona Residential Purchase Contract identifies both the buyer(s) and the seller(s) of the property and indicates the buyer’s desires to purchase the property identified in section 1 b. This identifies the address of the property, the tax identification number, and the legal description. Three methods insures all identifications point to the same property.
The next section details the offering price of the property, the amount of earnest money, and the method of payment for the property. Earnest money shows that the buyer is serious about purchasing the property and certain conditions can cause the buyer to lose his earnest money.
Additional funds at the close of escrow are indicated, and the amount of loan and type of loan is spelled out. For instance, a property is $200,000 with 20% conventional loan and $2,000 earnest money.
The financing portion of the contract is further enumerated in Section 2. We know the offer is for $200,000 with $2,000 earnest money, $38,000 additional funds at close of escrow, and a conventional first loan of $160,000.
Close of Escrow is defined as recordation, not when the signing takes place. Often close of escrow is close to the last day of the month because the buyer can bring less funds to the closing table.
Interest is paid on a per diem basis and if our interest is 3.875%, our interest would be about $6200 or about $16.99 a day. If we close on the 15th of the month, we have 15 days of interest or $254.85 to bring to the closing table, but if we close the 30th of the month, we only have $16.99 in interest.
Possession is at the close of escrow, or when the property transfer is recorded with the Pima County Recorder’s office.
Any addenda which is made a part of this contract; an “AS IS” addendum, a HOA (homeowners association) addendum, short sale addendum, lead based paint disclosure, water well or septic system addendum, a loan assumption, or seller financing, or an additional clause addendum are listed.
All items attached to the property stay with the property, including landscaping. And if the buyer wants the washer, dryer, refrigerator, or other appliances with the exception of the stove, they must be listed. Pool and spa equipment, fireplace equipment, water system and security systems transfer with the property. Furniture and personal items should be conveyed with a bill of sale.
And underneath the exclamatory phrase is “You are entering into a legally binding agreement” in large letters.
The Arizona Association of Realtors® is nearly screaming at you to pay attention to what you are about to sign.
There are eight caveats: Read the entire contract before you sign it. If you don’t understand something, ask!
It will tell you to review the Residential Seller’s Property Disclosure Statement, otherwise known as the SPDS. This will be given to you after mutual acceptance of the contract, if not before. The seller discloses all that he knows about the house to the best of his ability. With your agent, you should review all information to ascertain if there is additional information you may want to investigate during the ten day inspection period. On the basis of information in the SPDS, you may decide not to proceed with the contract. This is an important document.
The third item has to do with Inspections. The buyer can inspect for anything that is important to the buyer. This will include the Covenants, Codes and Restrictions (item 7) and other governing documents. If you have three 150 pound dogs, it is important to read the CC and R’s to make sure they are allowed in the community. But you may inspect for mold, have a roof inspection, a pest inspection, a pool inspection, and an HVAC inspection or anything else the buyer deems important.
During the inspection period, confirm that you can obtain insurance on the property. And you should have verified you can obtain a home loan. Any information requested by the lender should be provided immediately.
Your agent will review the title commitment with you and if there are problems with the title, they will be have to be resolved prior to close of escrow.
And finally, the buyer should conduct a final walk through to make sure the property is in the same condition as when originally seen and if repairs were requested, they were done in a workman like manner.
The cover page is explicit: “Verify anything important to you.”
The Arizona Department of Real Estate has made every effort to let consumers know their rights and responsibilities when purchasing a property. The buyer is entering into a legally binding agreement and can be held to that agreement in a court of law.
The buyer and seller must know what they are signing and should be working with an agent who takes the time to explain the entire contract and the ramifications of each section of the contract.
An agent who slides paperwork over to the buyer and/or seller and says “sign here” without an explanation may be binding those people to a legal contract which they do not understand. But then ignorance of the law is no excuse.
If you have a buyer’s agent, or a seller’s agent, their fiduciary responsibility is to you. It is far better for you to belabor the point until you understand the contract than to sign something which may cost you dearly in the end.
This series of blogs will explain the purchase contract in detail. I will break it down section by section. In the State of Arizona, which is not an attorney state, real estate agents are given the powers vested to attorneys in other states. Be sure you know your agent and if you desire to use an attorney, a good real estate agent should permit that.