What does the preliminary title report and commitment for title contain?
In addition to the findings of the title search, the prelim includes the legal description of the property and this should be checked with the legal description on the sales contract. The sales contract describes the property three ways; the street address, the parcel identification number or the assessor’s number, and the legal description.
There will often be a plat map showing the location and dimensions of the property and often a partial plat map of the subdivision. There may be drawings showing easements of the property on the plat map.
In the description of the property, easements will be described; most property contain utility easements. If there is common property, this too will be noted on the commitment.
If there is a Homeowner’s Association, the commitment will make reference to that fact and indicate where the HOA documents can be found in the recorder’s records. This will include the original documents for Covenants, Codes and Restrictions, and any amendments.
CC and R’s originally were put in place for the benefit of the builder and upon the build out of the subdivision, the Association is turned over, along with any common property, to the residents of the subdivision. There is nothing which requires a HOA; I live in a subdivision built in 1979 and upon the transfer of the “Association” to the residents, the residents promptly voted to abandon the HOA. This document is recorded.
Builders protect their investment by requiring standards so a resident doesn’t paint his house purple or store junk cars in the front yard. This would make the area less desirable for potential buyers and infringe upon the builder’s ability to sell new homes.
HOA dues must be brought up to date if in arrears, prior to transfer of title. Likewise, property taxes will be referenced and must be current prior to transfer of title, including late fees and penalties. The name of the association and management company with contact information is specified.
All liens on the property must be cleared prior to conveyance. And in community property states, the marital status of the buyers are specified. If a married person takes title alone, the spouse must sign a disclaimer deed which is recorded.
And of course any and all mortgages are itemized with the recording number, and including any Home Equity Lines of Credit. And the deed must be recorded from the grantor to the grantee.
Requirements to be fulfilled prior to recordation are itemized as well as the manner in which the documents must be signed, such as margin requirements.
The preliminary title report and commitment for title are important documents and must be read by the buyer, the seller, and both agents so that any errors can be corrected or problems with tile be solved prior to recordation.
Posts Tagged ‘Financing’
What does the preliminary title report and commitment for title contain?
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.
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 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.
“How can you afford not to buy a house now? Just hold it for five years and you’ll make a killing,” Marshall Vest, Chief Economist at the Eller School of Business, told a group of Realtors Thursday. The investor activity in Arizona is ratcheting upwards.
Vest sees that job growth is forthcoming, “we need job growth to solve our problems in Real Estate,” he said. Unemployment in Arizona is 9.4%, in Phoenix it is 8.4% and in Tucson, 8.3%, but Yuma is 23.2%. “We are now at the 1982 level of manufacturing and at the 1983 level in construction.” He sees slow growth in employment during 2011 and by the second half of 2013, a recovery of jobs lost.
Additionally the local market did not see the 5-6% upswing in retail sales shared by the rest of the country, retail sales are at the lowest point, and because many of the municipals depend upon sales tax for revenue, they are finding it extremely difficult to balance their budgets. Vest is looking at a 6 to 7% gain in retail sales this year, partially attributed to pent up demand. He sees 2011 as much better than 2009, which he termed a “disaster” and 2010 which was better. This will impact job growth positively.
Restaurant and Bar sales are up which is good for tourism and with the Gem and Mineral Show and Accenture Match Play around the corner, Tucson should benefit.
Credit creation is the key and will improve the mobility of people which will positively impact the absorption rate of housing statewide. As credit expands, spending will improve which will lead to more hiring which will strengthen the housing market. This will also help stabilize the public sector budgets. New housing starts will increase then, but until that time, there is additional “pain”.
Vest attributed the market meltdown to the creation of subprime and Alt A paper, the securitization of housing loans to a pool of mortgages which were then sold off. “We are now de-leveraging” from the expansion of credit and nationwide approximately 11% of all outstanding household credit is in some form of delinquency, Vest said.
Vest sees continued improvement and thinks by 2014, we should be back to “normal”, not the “new normal”.
Eller School of Business, University of Arizona
The economy is expanding, real Gross Domestic Product is up but the economy is facing some headwinds which include housing, the public sector, and the lack of mobility, said Marshall Vest, Director of the Economic and Business Research Center at the Eller College of Business, University of Arizona. Vest spoke Thursday at the Tucson Association of Realtors Summit.
Vest sees 2011 to 2013 as continuing to be economically better, but that expansion of the economy will not begin until 2014. Credit is still shrinking despite fiscal and monetary policy which are at “full throttle” . The housing and public sector will be a drag on the economy which will impact growth, and mobility rates are at a 60 year low.
On the brighter side, the economy has registered six quarters of positive growth and the GDP numbers being released today (January 28) should show growth in the 3 1/2% range. It is anticipated the growth during the fist quarter of this year will be in the 4 1/2% range, Vest said. (Numbers released this morning show a 3.2% GDP growth rate for the last quarter of 2010-see report in Resources below.)
Corporate profits are high and business is thinking about hiring which should ameliorate the jobs condition somewhat.
Household credit continues to decline and consumer confidence is positive compared to the last few years, “up over five full points at 60” which is still a recessionary level. Consumers remain concerned about the value of houses and are cautious and business is still uncertain about taxes, financial regulations being considered by Congress, health care costs, and weak demand.
Arizona has “an enormous inventory of vacant houses”, 130,000 or 4.9% of housing when the normal vacancy is 1.5%. The credit squeeze and the inability of people to sell houses in other areas impacts Arizona. Half of the migrants to Arizona are from California, and California has been hard hit by economic conditions. Vest said half of all Arizona homeowners are “upside down” .
Housing is “bumping along the bottom”; the tax credit has ended, building permits are down as are existing homes sales, home prices are down, and although foreclosures show a 4% decline from 2009, they are still high. Comparing 2005 to today, building permits are 2,000 verses 12,000; existing home sales are at an annual rate of 10,500 compared to 19,000 in 2005, and the median price in Tucson is now $140,000 and $120,000 in Phoenix.
Tomorrow: More of Marshall Vest
GDP Report January 28, 2010
A contrarian doesn’t wait until national magazines and newspapers let the world know prices are on the way up.
Trend analysis is the tool used and is important for those people who want to “get in on the ground floor”. The buy low, sell high mentality can’t wait for Time or Newsweek to announce home prices are up; by that time, the floor has risen considerably.
Sheer logic tells us this is true, think about the lead time needed for a reporter to first realize prices are on the way up, then gather information to substantiate the claim, write the story, then the editor has to decide if this is a cover story or not…which may be a few more weeks. Just as I am purveying this information after the fact, since prices are already on the way up, I too am late to the party!
Tucson Multiple Listing information for December 2010 shows that prices are up 3.13% from an average sales price of $180,736 in November to $186,399 in December. The average list price of a home is up 3.04% from November, or from $191,637 to $197,457.
The median sales price remained approximately the same between November and December with a .29% decrease from $139,900 in November to $139,500 in December.
Although the total number of homes under contract in December decreased 7.37% from 1900 in November to 1760 in December, traditionally the months of November and December see fewer people putting offers on homes because of the Thanksgiving – Christmas holidays.
Yet the total sales volume rose 16.93%, an impressive amount, from $144,588,779 in November to $169,063,508 in December. This represents an increase of 13.38% in total units sold within the Tucson Multiple Listing area, from 800 in November to 907 in December.
The holidays also see fewer people listing their homes. Many wait until January, beginning the new year with new intentions, having put the holidays behind. December new listings decreased 25.63% to 1,071 from 1,440 in November. This brought the number of active listings in the Tucson Multiple Listing Service area down to 6,859 in December, which is a decrease of 7.99% over November.
New home construction prices are also on the rise. In one subdivision I visited this weekend, prices on one model have had two increases in pricing within the last month.
Tomorrow we look at the various areas in Tucson and where the most homes are being sold…later this week we will revisit the numbers of short sales and foreclosures in the various areas.