Title Search

I’ve mentioned a Title Search in several posts about securing a mortgage and buying a house.  This is a very important document.  It substantiates the owner’s right to sell the property—that there are no other ownership claims or liens against it.  This verification is required by the buyer’s lending institution.  And, if as a buyer you are opting for owner financing, you will want the property to have a clear title (or understand the possible consequences of not having one).

If you are planning to apply for a mortgage loan from a traditional lender a title search ultimately will be done for a fee by professionals in the title abstract field.  A lender is not likely to accept your own research.  However, should you find something questionable (something that could lead the lender to decline the loan) doing a search of your own as a preliminary to applying for that loan could save you the application fee.  And, again, if you will be buying directly from the owner, you will want to know that your future right to own and sell the property will not be challenged by something from the past.

By the way, many people (even professionals in the field) will use the terms “title abstract” and “title search” almost interchangeably.  There is a difference.  A title abstract is basically a chronological listing of every recorded legal document associated with a property—some of them being fairly insignificant to a current sale e.g., the quit claim of a house from one spouse to the other; this would only be of interest if it resulted from or in a title problem.  A title search on the other hand is a thorough search of records specifically to find problems (or their absence).  The result is a report also called a Title Search.  It may go back quite a few decades.   To put it in perspective: Consider the claims of Native Americans on parcels of land in various parts of the United States.  The disputes can be traced to documents (or the lack of them) and their legality from a couple of centuries ago.  Some of these disputes have resulted in large financial settlements. Granted, the suits are federal rather than private, but a parallel can be made.

The report resulting from the title search will include a legal description of the property, i.e., physical address, subdivision, lot number, etc.  It will also list tax information and any encumbrances.  —Encumbrances are a multitude of issues, including:

            Liens—These are claims against a property to secure a financial obligation or debt owed by the owner.  There are several types of liens.  A mechanic’s lien denotes an unpaid bill for work (or materials involved) done on the house or property, e.g., painting or roofing.  Unpaid taxes commonly result in a lien.  A lien can be put in place against the property as part of a judgment against the owner.  (The cause for the judgment need not even be related to real estate.)  Here’s a conundrum:  Sometimes a property owner can be forced to sell in order to satisfy lien-holders.  It is, however, difficult to obtain new financing when liens are in place. — In situations like this buyer can benefit greatly from having a legal advisor that specializes in real estate.

            Covenants—These are deed restrictions.  They govern how a property may be used, as well as what structures may be present.  Especially in new subdivisions, developers, builders, and homeowners associations establish covenants to maintain the quality and value of the property.  A covenant could limit on-street parking, the number and type of trees in each yard, the number and style of storage or utility sheds on the property, even the type and placement of children’s play structures—the list can be virtually endless.  Here’s a historical note: In the past, owners could place restrictions on deeds that would prohibit certain people from ever buying that specific property.  In the mid-1900s the US Supreme Court ruled that if based on race these restrictions were unenforceable.  Now, tight strictures (and their enforcement) tend to limit buyer pools to those that appreciate them. (And to those who can afford to live with them.)

            Licenses—These are privileges granted by the property owner that allow someone a particular use of the property.  For example, years ago I bought a house adjacent to a park.  On move-in-day I was busy unpacking when my kitchen door opened and in trooped five kids.  They were on the way to my bathroom when they realized they didn’t know me.  (We were all shocked!)  Anyway, it seems there was a general agreement in the neighborhood that the children were free to use the bathroom in any house next to the park as long as the back door was unlocked.  I can tell you that was one license I quickly suspended (until I became acquainted with their parents).  This particular arrangement (this license) had been established by verbal agreement, but a license can also be granted in writing.  Either way, licenses can be withdrawn at the property owner’s discretion. —Because of their flexible and informal nature, a researcher may not find the licenses attendant to a property when a title search is done.  But once in a while one is recorded (this does not make it any more permanent), so I’ve included the topic in this discussion.

            Easements:  These are permanent privileges— specific usage rights that transfer with a change of user.  The owner retains title to the property, but the party to whom the easement is granted has a real interest in it and to deny usage (for the stated purpose) would make the owner liable for litigation.  Understanding the intent of the easement is important—and so is the wording of the document.  Easements are recorded documents.  Types of easements include:

                        Easement in Gross: Utility companies commonly hold this type of easement.  It allows workmen and equipment onto property; a clause will allow them to place structures needed to maintain (or establish) service.  The rights granted can be sold or transferred to another like company when the service provider changes.  These easements are usually established on every parcel of land in an area during the development stage.  They are the reason the wall of a house (or sometimes, even a fence) cannot be built directly on a property line.

                        Easement Appurtenant: This occurs when the owner of a property has secured some right of use to an adjacent property with a different owner.  A common form of this easement is the shared driveway or the one that must cross a neighboring property in order to access the public road.  This last example is further defined as an easement by necessity.  The owner seeking the easement must be able to show in court that: (1) there is no way to access the public road from his property, (2) the property on which he wants easement to place the driveway does have access to the public road and (3) his property and the one he wishes to cross, share are adjacent.

Other types of easements may be encountered.  One of interest is the Negative Easement: This type of easement prevents a property owner from doing something that would adversely affect an adjacent property—like obstructing their view of the ocean with a 20-ft. fence.  Basically, easements are established for fairness, but prospective buyers and financers often consider them to be a problem.

            Encroachments:  An encroachment is the invasive use of a property from one adjacent to it.  Usually it is unintentional.  Probably, the most common encroachment is the fence that is set a few inches (or maybe, more) on the wrong side of a property line.  A more serious encroachment would be part of a permanent structure extending a considerable distance into the neighboring property.  Encroachments are usually discovered when a survey of the offered property is done at the request of the          prospective buyer (or his lender).  Owner resolutions to an encroachment vary:  An owner may be recompensed for damages; the offending part of the structure may have to be removed, etc.  Legal assistance is frequently required.  — The amount of time an encroachment has been in place (unrecognized or ignored by the current or previous owners) is a major concern.  The number of years will vary by state, but encroachments that are not confronted and resolved in a timely way become permanent encroachments—prescriptive easements—by law.  This becomes an inherent problem in that prescriptive easements might not be documented, apparent only after a survey is done (or by talking to the neighbors).  When discovered, they are viewed as problematic in the transfer of property titles, but is should be noted that (sometimes) the problem is rooted more in emotions than practicality.  Before declining an offered property, a prospective buyer (especially one interested in taking advantage of owner financing) should always consider how detrimental to the use (or appearance) of the property the encroachment really is.  Some mortgage providers will also take this into consideration.

As with any other aspect involved with the buying of a house and obtaining a mortgage (or other financing) there are many things to be considered when interpreting the ramifications of the findings in the report.  A buyer is wise to educate himself in these matters.  In my next post I plan to give information on how to do a title search.

What to Expect at a Real Estate Closing

Closing—if there’s one word associated with buying a house that’s guaranteed to cause anxiety, it’s this word.  Of course we’ve all heard horror stories about transactions that fall through right at the end.  They are disheartening, but the event is really intended to facilitate a smooth financial settlement and transfer of property.  Most conclude satisfactorily.

That said, during the course of the closing process you will be exposed to a lot of official information.  Official can be translated as “financial and legal”— and maybe, as tedious. But based on the documents you sign, you will make commitment(s) that have long-lasting impact.  So, in addition to financially, you want to be prepared mentally and physically.  —To me, that means alert, not hungry and (to the greatest possible extent) with nerves under control.

In situations like this, ignorance is my greatest disadvantage.  On the other hand, a decent idea about what’s going on is very helpful.  My goal with this post is to give you a decent idea as to what you will encounter in this meeting.  Hopefully, you will gain some peace of mind.

The first thing you need to do is make sure the timing of this meeting works for you.  A number of people and agencies (the seller, the agent, the bank or other mortgagee, attorneys, etc.) have devoted time and effort to bring this transaction to its conclusion and ultimately, all expect to leave with some sort of financial gain.  But, you—the buyer—are the star of the show.  If you don’t come away with your prize (the house) and the responsibility that goes with it, few will get that satisfaction.  You want your house.  You want this meeting to go smoothly.  A scheduling crunch would not be advantageous to either your attentiveness or your peace of mind.  So, you should give some consideration to what else is in your plan of the day.  Here are two sets of things to consider:

The first set involves timing—What’s on your schedule for the rest of the day?

An hour is usually allotted for a closing meeting.   If something unexpected comes up, it could take longer:  Don’t try to close over your lunch hour.  Besides, this is a big event; you may want to take some time to celebrate.  And, do allow yourself plenty of travel time—it’s not common, but some real estate sales fall through because the buyer is late.

Some buyers are also sellers.  If so, you may need the money from the sale of a property you own to make the down payment on the one you want to buy.  You could have two closings in one day.  Schedule the one in which you are the seller as early in the day as possible.  Depending on the various lenders and agents involved, the second meeting—the one at which you are the buyer—may follow immediately, but it’s possible it will be awhile and at a different location.  Set the time of the second meeting to allow for the unexpected in the first and (again) plenty of travel time.  Also, since selling a property carries its own excitement and stress, it doesn’t hurt to give yourself time to relax and refresh before you become the buyer.

Closing day is sometimes moving day.  If you plan to move into your new house the day you close, get the closing done early in the day.  Whether you have scheduled a moving company or are moving yourself, this is another event that requires time and is prone to unexpected happenings. (And again, it should hold an element of celebration.)  If you’ve been renting, you’ll probably want to schedule the closing near the end of your lease.  Or, if there are repairs and remodeling going on, you may want to pick a date that allows you to keep your current residence for a couple of weeks (or months) while the work is completed.

The second set of considerations continues to involve timing, but in conjunction with some timely monetary considerations.  (As if a closing isn’t all about money—Ha!)

Don’t lose the “locked in” interest rate on your mortgage.  Make sure your closing date falls before that option expires.

Consider tax advantages.  Currently, the interest you pay on your mortgage can be deducted from your taxes.  This gives you two things to think about:  For a while, your mortgage payments are going to consist almost entirely of interest and it is possible to prepay interest.  If you schedule your closing shortly before the end of the year, you can reap a quick tax advantage by claiming the deduction when you fill out your tax forms sometime in the next few months.  (Note: Points paid at closing are not usually tax deductible and as none of your down payment is paid to the seller and not applied against your mortgage loan as either interest or principle, it is not deductible.)

Your closing meeting will be overseen by a closing agent.  Depending on the state in which you are purchasing property, this person may be required to be an attorney.  Securing a closing agent can be done by the buyer or the seller, but buyer’s lending institution often makes the arrangements.  This agent represents neither you nor the

seller.  He makes sure the paperwork is legally filled out and that funds are properly distributed.  If there are questions, he can explain but not advise.  Because the closing agent (attorney or not) is required to be neutral, it’s conventional (and wise) for both you—the buyer—and the seller to have your own attorneys present.  In some cases, the seller may be excused from the meeting and represented by an attorney.  But, the buyer must be present.  And if you are married, your spouse needs to be present. (However, “must” is not always must.  Sometimes the buying party also may be represented by an agent with proper Power of Attorney.)  The lender and the real estate company might send representatives.  Less typically, there could be others with a claim or interest in the property present.

The location for this meeting can vary.  Often, it is held at an attorney’s office or a title company.  (The office of the buyer’s attorney is frequently used.)  Sometimes the lender’s office is used.  Or, even a real estate office.  —The professionals will work that out ahead of time and it will take place where there is enough room to keep in order all the documents you’ll read and sign.

And sign you will! —You’ll be likely to sign your name 20 to 30 times, maybe even more.

Some documents will deal primarily with your mortgage:

            Truth in Lending Disclosure Statement:  Your lender is required to provide the

interest rate, annual percentage rate, amount financed, and the total cost of the

loan for its duration.

Itemization of Amount Financed:  This document summarizes and verifies the Truth in Lending Disclosure Statement.  It provides specific financial descriptions and figures—like points.

Monthly Payment Letter:  This document shows your total monthly payment and also breaks it down proportionally into its parts: Principal, Interest, and various escrows—like Taxes and Insurance.

Promissory Note and Mortgage:  These are two separate documents.  By signing the Note, you borrow the money to buy your house.  You also guarantee repayment.  In signing the Mortgage you allow your lender to hold your house as security against your failure to repay the Note.  (This allows the lender to foreclose on your property should you default.)

It is important to read each document and understand it before you sign it.  Figures should be checked against information you received previously.  Those that were estimates should not have huge discrepancies.  (Shortly after you applied for your loan, your lender should have given you a Good Faith Estimate of your closing costs. —Take a copy to your closing for comparison.)   If you any questions, ask for clarification before you sign.

You’re not done signing yet.  The following documents cover the transfer of the property to you.  (Not without some more financial issues, of course.)  Again read for understanding, and to make sure any errors are corrected before you sign these documents.  The seller will also be signing some of these documents.  In addition, there will be several documents (that I’ll not list here) requiring only the seller’s signature.

HUD-1 (Settlement or Disclosure Statement):  This document declares the

various costs and amounts of the settlement.

Warranty Deed:  This is the document that transfers the title of the property to

you!  It will include your name, the seller’s name, and a description of the

property.  (It may include a declaration of the seller’s right to sell.)

Proration agreements:  You may have several of these to sign.  They define how

you and the seller agree to cover the property expenses for the current month (or

a longer period).  These will include property taxes and association dues, possibly

utilities and some services.  This is necessary as cyclic bills do not all fall due on

the same date.  If a bill, not due immediately and perhaps not yet even figured, is

to be split (Property taxes for the current year are a prime example.) you and the

buyer will sign a document stating that a cooperative division of the payment will

be figured and made at the appropriate time.  A copy of this will be put on record

with the proper agency. Also, it’s not unheard of for a seller to remain in

residence past the closing date or for a buyer to move in beforehand.  These

agreements define each parties’ responsibilities during the overlap (and in the

case of the seller, the end to any responsibility).  It’s possible that some

reimbursements are due to one party or the other.  In theory these are paid off

individually.  In practice, one check is written in the amount of the difference by

the one of you owing the most.

Name Affidavit:  You (and your spouse) must verify that you are who you say

you are (and should list any a.k.o.s).  Make sure you have on hand the usual two

official forms of id—one of them must be photo: A driver’s license and credit

card should do.

Acknowledgment of Reports:  Signing this document affirms that you have seen

all the ordered reports on property you are purchasing.  These reports will almost

certainly include the termite inspection and a survey of the property.  A flood

evaluation is becoming more common in many places.  There may be others.

Title Search or Title Abstract:  You will sign one or the other of these documents.

(An abstract, however, could be attached to a title search.) Essentially, each of

these is a chronological list of all documents and actions on record about the

property you are buying.

The above should give you a sense of what you will sign at your closing.  The documents on this list are fairly common.  Depending on your locale and the findings in various searches and reports you may have others to sign and you will probably have to provide proof of things like Homeowner’s Insurance.  Regardless, you do not have to be surprised.  Do some homework.  (You really do need to read these documents ahead of time.  If the closing meeting is your first exposure to them, an hour will not be nearly long enough to cover everything.)  Talk to the various professionals involved; they’ve done this before.  They can tell you what to expect, both generally and in your particular instance.  If you have reached Closing, all parties are interested in a successful transaction.

There is one other important aspect of your Closing:  Paying.  I mentioned above that you and the buyer will probably settle a few small accounts.  You will have to provide a certified check to cover these larger sums:

            Closing Costs:  These cover a variety of fees, including any points you’re paying

to buy down your mortgage interest rate.  Closing costs can vary, but generally

run at 2-4 percent of the purchase price for your property; they should be

negotiated ahead of time.  Within 24 or 48 hours before your closing call the

closing agent’s office to get an anticipated figure.  Purchase a certified check in

that amount.  Have it made payable to you.  (You’ll sign it over at the meeting.).

You should also be prepared to write a personal check to cover any slight increase

in these charges as until paid they are really only estimates.  (As another

safeguard against exorbitant changes check your closing costs against the figure

on line 303 of your HUD-1 Settlement Statement (refer to the above section on

documents you will sign).

Payment for the House:  You will be expected to make your down payment to the seller at the closing. The amount of this payment will have been negotiated early in the process of buying a house.  The amount you now pay will be adjusted down by any applicable deposits you may have made.  A personal check is rarely acceptable, so this figure is usually included in the total for the certified check covering your closing costs, (The closing agent will have funds from your lender—likely a check—for the balance of the purchase price.)  And, by the way, the seller does not actually receive his money the day you close.  It takes a few days for the closing agent to make the required disbursements.

Escrow Accounts:  These are reserve accounts designed for the accumulation and disbursement of funds for recurring, long-term bills, like required insurances or annual property taxes.  They are usually managed by your mortgagee. The money to set up these accounts is likely to be included as part of the total for the certified check you’ll bring.  Thereafter, part of each monthly house payment will go to Escrow. —And in practice it will be just one account; the individual bills will be accounted for through bookkeeping.

There is no doubt about it:  You will be committing a lot of money on the day of your closing.  You will be committing it to your future. —That’s exciting!  In the days preceding this event take the time to talk to the professionals involved.  Familiarize yourself with the documents, forms, and figures.  View them with the perspective of what you will gain—your house.  If you do this, you should experience more anticipation than anxiety at your closing.

real estate closing

What to expect at a real estate closing

Closing—if there’s one word associated with buying a house that’s guaranteed to cause anxiety, it’s this word.  Of course we’ve all heard horror stories about transactions that fall through right at the end.  They are disheartening, but the event is really intended to facilitate a smooth financial settlement and transfer of property.  Most conclude satisfactorily.

That said, during the course of the closing process you will be exposed to a lot of official information.  Official can be translated as “financial and legal”— and maybe, as tedious. But based on the documents you sign, you will make commitment(s) that have long-lasting impact.  So, in addition to financially, you want to be prepared mentally and physically.  —To me, that means alert, not hungry and (to the greatest possible extent) with nerves under control.

In situations like this, ignorance is my greatest disadvantage.  On the other hand, a decent idea about what’s going on is very helpful.  My goal with this post is to give you a decent idea as to what you will encounter in this meeting.  Hopefully, you will gain some peace of mind.

The first thing you need to do is make sure the timing of this meeting works for you.  A number of people and agencies (the seller, the agent, the bank or other mortgagee, attorneys, etc.) have devoted time and effort to bring this transaction to its conclusion and ultimately, all expect to leave with some sort of financial gain.  But, you—the buyer—are the star of the show.  If you don’t come away with your prize (the house) and the responsibility that goes with it, few will get that satisfaction.  You want your house.  You want this meeting to go smoothly.  A scheduling crunch would not be advantageous to either your attentiveness or your peace of mind.  So, you should give some consideration to what else is in your plan of the day.  Here are two sets of things to consider:

The first set involves timing—What’s on your schedule for the rest of the day?

An hour is usually allotted for a closing meeting.   If something unexpected comes up, it could take longer:  Don’t try to close over your lunch hour.  Besides, this is a big event; you may want to take some time to celebrate.  And, do allow yourself plenty of travel time—it’s not common, but some real estate sales fall through because the buyer is late.

Some buyers are also sellers.  If so, you may need the money from the sale of a property you own to make the down payment on the one you want to buy.  You could have two closings in one day.  Schedule the one in which you are the seller as early in the day as possible.  Depending on the various lenders and agents involved, the second meeting—the one at which you are the buyer—may follow immediately, but it’s possible it will be awhile and at a different location.  Set the time of the second meeting to allow for the unexpected in the first and (again) plenty of travel time.  Also, since selling a property carries its own excitement and stress, it doesn’t hurt to give yourself time to relax and refresh before you become the buyer.

Closing day is sometimes moving day.  If you plan to move into your new house the day you close, get the closing done early in the day.  Whether you have scheduled a moving company or are moving yourself, this is another event that requires time and is prone to unexpected happenings. (And again, it should hold an element of celebration.)  If you’ve been renting, you’ll probably want to schedule the closing near the end of your lease.  Or, if there are repairs and remodeling going on, you may want to pick a date that allows you to keep your current residence for a couple of weeks (or months) while the work is completed.

The second set of considerations continues to involve timing, but in conjunction with some timely monetary considerations.  (As if a closing isn’t all about money—Ha!)

Don’t lose the “locked in” interest rate on your mortgage.  Make sure your closing date falls before that option expires.

Consider tax advantages.  Currently, the interest you pay on your mortgage can be deducted from your taxes.  This gives you two things to think about:  For a while, your mortgage payments are going to consist almost entirely of interest and it is possible to prepay interest.  If you schedule your closing shortly before the end of the year, you can reap a quick tax advantage by claiming the deduction when you fill out your tax forms sometime in the next few months.  (Note: Points paid at closing are not usually tax deductible and as none of your down payment is paid to the seller and not applied against your mortgage loan as either interest or principle, it is not deductible.)

Your closing meeting will be overseen by a closing agent.  Depending on the state in which you are purchasing property, this person may be required to be an attorney.  Securing a closing agent can be done by the buyer or the seller, but buyer’s lending institution often makes the arrangements.  This agent represents neither you nor the

seller.  He makes sure the paperwork is legally filled out and that funds are properly distributed.  If there are questions, he can explain but not advise.  Because the closing agent (attorney or not) is required to be neutral, it’s conventional (and wise) for both you—the buyer—and the seller to have your own attorneys present.  In some cases, the seller may be excused from the meeting and represented by an attorney.  But, the buyer must be present.  And if you are married, your spouse needs to be present. (However, “must” is not always must.  Sometimes the buying party also may be represented by an agent with proper Power of Attorney.)  The lender and the real estate company might send representatives.  Less typically, there could be others with a claim or interest in the property present.

The location for this meeting can vary.  Often, it is held at an attorney’s office or a title company.  (The office of the buyer’s attorney is frequently used.)  Sometimes the lender’s office is used.  Or, even a real estate office.  —The professionals will work that out ahead of time and it will take place where there is enough room to keep in order all the documents you’ll read and sign.

And sign you will! —You’ll be likely to sign your name 20 to 30 times, maybe even more.

Some documents will deal primarily with your mortgage:

            Truth in Lending Disclosure Statement:  Your lender is required to provide the

interest rate, annual percentage rate, amount financed, and the total cost of the

loan for its duration.

Itemization of Amount Financed:  This document summarizes and verifies the Truth in Lending Disclosure Statement.  It provides specific financial descriptions and figures—like points.

Monthly Payment Letter:  This document shows your total monthly payment and also breaks it down proportionally into its parts: Principal, Interest, and various escrows—like Taxes and Insurance.

Promissory Note and Mortgage:  These are two separate documents.  By signing the Note, you borrow the money to buy your house.  You also guarantee repayment.  In signing the Mortgage you allow your lender to hold your house as security against your failure to repay the Note.  (This allows the lender to foreclose on your property should you default.)

It is important to read each document and understand it before you sign it.  Figures should be checked against information you received previously.  Those that were estimates should not have huge discrepancies.  (Shortly after you applied for your loan, your lender should have given you a Good Faith Estimate of your closing costs. —Take a copy to your closing for comparison.)   If you any questions, ask for clarification before you sign.

You’re not done signing yet.  The following documents cover the transfer of the property to you.  (Not without some more financial issues, of course.)  Again read for understanding, and to make sure any errors are corrected before you sign these documents.  The seller will also be signing some of these documents.  In addition, there will be several documents (that I’ll not list here) requiring only the seller’s signature.

HUD-1 (Settlement or Disclosure Statement):  This document declares the

various costs and amounts of the settlement.

Warranty Deed:  This is the document that transfers the title of the property to

you!  It will include your name, the seller’s name, and a description of the

property.  (It may include a declaration of the seller’s right to sell.)

Proration agreements:  You may have several of these to sign.  They define how

you and the seller agree to cover the property expenses for the current month (or

a longer period).  These will include property taxes and association dues, possibly

utilities and some services.  This is necessary as cyclic bills do not all fall due on

the same date.  If a bill, not due immediately and perhaps not yet even figured, is

to be split (Property taxes for the current year are a prime example.) you and the

buyer will sign a document stating that a cooperative division of the payment will

be figured and made at the appropriate time.  A copy of this will be put on record

with the proper agency. Also, it’s not unheard of for a seller to remain in

residence past the closing date or for a buyer to move in beforehand.  These

agreements define each parties’ responsibilities during the overlap (and in the

case of the seller, the end to any responsibility).  It’s possible that some

reimbursements are due to one party or the other.  In theory these are paid off

individually.  In practice, one check is written in the amount of the difference by

the one of you owing the most.

Name Affidavit:  You (and your spouse) must verify that you are who you say

you are (and should list any a.k.o.s).  Make sure you have on hand the usual two

official forms of id—one of them must be photo: A driver’s license and credit

card should do.

Acknowledgment of Reports:  Signing this document affirms that you have seen

all the ordered reports on property you are purchasing.  These reports will almost

certainly include the termite inspection and a survey of the property.  A flood

evaluation is becoming more common in many places.  There may be others.

Title Search or Title Abstract:  You will sign one or the other of these documents.

(An abstract, however, could be attached to a title search.) Essentially, each of

these is a chronological list of all documents and actions on record about the

property you are buying.

The above should give you a sense of what you will sign at your closing.  The documents on this list are fairly common.  Depending on your locale and the findings in various searches and reports you may have others to sign and you will probably have to provide proof of things like Homeowner’s Insurance.  Regardless, you do not have to be surprised.  Do some homework.  (You really do need to read these documents ahead of time.  If the closing meeting is your first exposure to them, an hour will not be nearly long enough to cover everything.)  Talk to the various professionals involved; they’ve done this before.  They can tell you what to expect, both generally and in your particular instance.  If you have reached Closing, all parties are interested in a successful transaction.

There is one other important aspect of your Closing:  Paying.  I mentioned above that you and the buyer will probably settle a few small accounts.  You will have to provide a certified check to cover these larger sums:

            Closing Costs:  These cover a variety of fees, including any points you’re paying

to buy down your mortgage interest rate.  Closing costs can vary, but generally

run at 2-4 percent of the purchase price for your property; they should be

negotiated ahead of time.  Within 24 or 48 hours before your closing call the

closing agent’s office to get an anticipated figure.  Purchase a certified check in

that amount.  Have it made payable to you.  (You’ll sign it over at the meeting.).

You should also be prepared to write a personal check to cover any slight increase

in these charges as until paid they are really only estimates.  (As another

safeguard against exorbitant changes check your closing costs against the figure

on line 303 of your HUD-1 Settlement Statement (refer to the above section on

documents you will sign).

Payment for the House:  You will be expected to make your down payment to the seller at the closing. The amount of this payment will have been negotiated early in the process of buying a house.  The amount you now pay will be adjusted down by any applicable deposits you may have made.  A personal check is rarely acceptable, so this figure is usually included in the total for the certified check covering your closing costs, (The closing agent will have funds from your lender—likely a check—for the balance of the purchase price.)  And, by the way, the seller does not actually receive his money the day you close.  It takes a few days for the closing agent to make the required disbursements.

Escrow Accounts:  These are reserve accounts designed for the accumulation and disbursement of funds for recurring, long-term bills, like required insurances or annual property taxes.  They are usually managed by your mortgagee. The money to set up these accounts is likely to be included as part of the total for the certified check you’ll bring.  Thereafter, part of each monthly house payment will go to Escrow. —And in practice it will be just one account; the individual bills will be accounted for through bookkeeping.

There is no doubt about it:  You will be committing a lot of money on the day of your closing.  You will be committing it to your future. —That’s exciting!  In the days preceding this event take the time to talk to the professionals involved.  Familiarize yourself with the documents, forms, and figures.  View them with the perspective of what you will gain—your house.  If you do this, you should experience more anticipation than anxiety at your closing.

Owner Financing: Pros and Cons for Buyers

Owner financing can be an alternative source of funding when buying a house.  It may be a way for a homebuyer to purchase property for which he is not financially qualified (fully or in part) by traditional lending institutions.  But, if a buyer is not qualified for a loan, there has to be a reason a seller is motivated to take on the role of his mortgagee (lender).

Why isn’t the property attracting buyers?  —Well, it could be that tight funding has limited the number of buyers.  It could be that the property is overpriced or in poor condition.  (So, no interested, qualified buyers.)  Or, it could be that everything is fine and this owner wants a long-term income.  Regardless the owner’s reason, if you are considering this type of financing, you—the buyer—need to research the property for suitability and then decide if a private arrangement will work for you.

Here are some things to consider—both pros and cons.

I’ve already mentioned that the seller might be asking an exorbitant price for the property, perhaps relative to its location or condition.   (Note: It might not be you, but rather the property, that disqualifies traditional financing.)  Also, the owner may require a large down payment.  Or, the interest rate may be higher than that of a conventional mortgage.  (That may be the seller’s way of getting an equivalent to money that lending institutions charge as fees associated with mortgage loans.)  Monthly payments may be high. And often, owner financing is short-term (possibly, a few years) with a balloon payment due at the end of the contract.  Many buyers must be prepared to refinance.  (At that point their financial profile and the property must be conducive to qualifying for a traditional mortgage.)

With reference to the above:  In my last post I said that owner financing could be useful to a potential buyer with a less than desirable financial history—a history making him unlikely to qualify for conventional funding.  “History” is key here.  Entering into a sensitive financial contract, like a mortgage, while in the throes personal economic crisis (and given this type of financing, it is occasionally possible to do so) promotes disaster.  Homeowners always encounter unforeseen circumstances requiring the outlay of money—financial stability is imperative.

One risk deserves great consideration:  There are some forms of seller financing in which the seller remains financially responsible to a lending institution for the property. (Wrap, combo financing and, possibly, option financing are among these.) You—the buyer—make payments to the seller and he makes his mortgage payments.  But what happens if he doesn’t?  If he defaults, you could lose the property and everything you have invested in it.

A buyer does need to protect himself as much as possible.  As with other major financial commitments, it is wise to have a legal representative advising you as the terms of the contract are determined.  Most sellers do.

There are also a number of positives for the buyer to consider.  Right away you’ll notice that a few seem to be (almost) the flip-side to some of the issues requiring cautious regard.  —Many aspects of this financing have to do with the seller’s motivation.  Some sellers are actually predatory.  They find buyer after buyer who will not be able to sustain the contract and so, repossess and resell their property a number of times.  These people are unscrupulous, but as you are dealing in a private sector—owner financing— there are few regulations to enforce ethics.  Thankfully, most owners are interested in a successful sale.

If you are dealing with a well-motivated seller, you may be able to purchase a desired property for which a lending institution won’t qualify you.  (The issue of qualifying is complex.  Above, I said that sometimes the price, condition, or location of the property prohibits qualifying.  As another example:  Your finances may be quite sound.  Even so, because you recently married, divorced, changed jobs—and the list goes on—banks may refuse to qualify you for a mortgage loan; they don’t like change.)

Negotiations with the seller eliminate the need to shop around for the best deal.  This and other aspects can save some time:  Conventional lenders often take awhile to have the property researched for a clear title.  You can do this yourself and save time.  (Again, you would be wise to have knowledgeable legal counsel to guide you.)  Dealing directly with the seller may be speed up closing—and moving in before closing may not be an issue.

With owner financing you will avoid many of the fees associated with a mortgage from a conventional lender.   It’s also likely you will have considerably more input on the terms of the contract.  Down payment, interest rate, monthly payments, duration of the loan, even a resale clause are among the terms that can be negotiated.  Some of these can result in significant liberties and savings:  A private seller is not bound by “company policy” nor tied to a financial index.  You may even find a seller who is willing give you a discount should you do an early payoff.  (Banks frequently charge a fee for this.)

Most sellers doing private financing are not credit bureau subscribers.  (Subscription fees are quite high.)  This means they cannot make as comprehensive a check into your finances and personal history as a bank; you will be able to maintain a greater level of privacy.  They may, however, ask you for references and to provide a copy of your financial report.  Another aspect of this is that your payments will not be reported:  Owner financing will do little to help you build a positive financial profile.  On the other hand, should you encounter financial hardship during the course of your contract, a motivated seller might be more responsive than a bank to concessions and renegotiation.  And again, it would be a private matter and at least mitigate the effect on your credit standing.

It is important to be financially prepared to buy a house.  It is also important to realize that finances are not the only factor involved when qualifying for a mortgage.  —And, to realize that not qualifying does not mean financing is not available.  Owner financing is not common.  But with patience and persistence, it’s possible you will find a suitable property and a motivated seller.

Owner Financing

Owner financing can be an alternative to a bank loan when you are buying a house.  Even when mortgage money is tight—either because of a falling economy or because of a poor credit history—there are owners who are willing to “carry back” a part of the purchase price to facilitate the sale of their property.

The term “owner or seller carryback” refers to the seller of a property being willing to finance (in part or whole) the purchase price of the offered property.  Typically, this is not a monetary loan.  Also, in some of these arrangements, the seller does not receive full payment at once—but the property is his security.  Instead, the seller extends credit to the buyer and is paid back with interest.  Both parties sign a promissory note stating the sales agreement and payment terms; many terms of these can be negotiated, including down payment, interest rate, and length of contract.  Then, the agreement has to be filed with public records—usually as a trust deed, mortgage, or land contract.

A seller can be involved with financing either pre or post closing. There are 8 common forms of owner financing.  Four involve a financial accord after closing and four before closing.

Post-closing types include:

Free and Clear Financing:  If the seller owns the property free of any encumbrances (no mortgage or other liens), the buyer and seller negotiate all terms.

Equity Only Financing:  When there is a mortgage or other lien in place against the property, the seller may not be free to finance anything but his own equity.  In this case the buyer must pay off the seller’s outstanding balance(s) at closing—usually by obtaining new financing.

Wrap Financing:  Sometimes, when the seller is still involved with a lending institution, he is allowed to do what amounts to passing along funds from the buyer.  In this case the buyer makes payments to the seller.  The seller (who might not have much equity in the property) remains responsible to pay his financial obligation on the property—usually a lesser amount than that received from the buyer.  The seller seems to continue to build equity in the property, but just as he passes payment to his mortgagee, the equity (essentially) passes to the buyer.  This type of financing is also known as “blanket,”  “issue to,” or “subject to.”

Combo Seller Financing:  If the seller has some amount of equity, but is still encumbered, he may generate what amounts to two loans to the buyer.  One loan finances the equity purchase, the other is wrap financing.  The terms (interest rates, payment schedule, duration, etc.) of each loan would be independent of the other.  Literally, this is a combination of equity only financing and wrap financing

The following four types of owner financing are in effect prior to closing:

Purchase Option:  In this form of owner financing the buyer and seller have an agreement (usually accompanied by an “option fee,” paid by the buyer) that locks in the purchase price—sometimes discounted—for a designated period of time.  If within that time period the buyer does not go through with the purchase, he is released from any obligation to buy (but the option fee is not refunded).  In the interim the seller remains financially responsible in full for the property.  Buyers, who have not prearranged funding, often find the Purchase Option useful.  —The “Rent to Own” arrangement is a well-known form of the Purchase Option.

Extended Closing:  This is similar to a purchase option, but more terms of the sale may be defined—one of them being an extended deadline for closing.  (Frequently, this gives the buyer time to sell a piece of property or terminate a lease.)  The arrangement is formalized with a Real Estate Purchase Contract.  Often a fee (basically, “Earnest Money”) is required of the buyer.  If this is the case, under certain circumstances, detailed in the REPC, that fee can be refunded if the sale does not go through.

Open–ended Closing:  This type of owner financing also involves a Real Estate Purchase Contract.  One of the terms on which the closing depends is a future event—often, something for which the seller is responsible—like the completion of a remodeling project.

Seller Partnerships:  In this arrangement “sweat equity” on the part of the buyer is an essential component.  Depending on the terms of the contract the seller may or may not actually transfer ownership to the buyer.  Either way, he retains financial interest in the property.  As in any partnership both parties contribute:  The seller contributes the property and possibly funds to improve it.  The buyer might also contribute financially, but his major role is to do “clean up/fix up”—to enhance the value and salability.  The buyer then refinances or sells the property.  At the closing the original owner receives his equity payment and is reimbursed for any capital contributed.  Profit is split according to the terms of the partnership agreement.

I began this post saying owner financing could benefit a buyer having a difficult time securing a mortgage from a traditional lender.  This does not mean that most sellers are particularly amiable to these arrangements.  They need to benefit also.  In my next post I’ll address the pros and cons of this type of financing

Mortgages

In my last few posts I’ve presented information about the traditional mortgage and adjustable rate mortgage:  The traditional mortgage is the most popular way to finance buying a house in the United States. An adjustable rate mortgage has features beneficial to someone with a fluctuating income.  (Those same features can turn detrimental if the homebuyer is not prepared to make payments that grow larger over the life of the mortgage.)

Compared to the traditional mortgage, an adjustable rate mortgage is creative financing—but it is acquired through traditional lenders, like banks.  A tight economy (or a less than appealing financial history) makes obtaining a mortgage from those sources difficult.  But, it may not be impossible to find financing.

Earlier in this series I brought up owner financing as an alternative to obtaining a mortgage from a traditional lender.  My next post will address ways motivated sellers provide funding in lieu of or in addition to a mortgage.

Owner Finance

Adjustable Rate Mortgage

The adjustable rate mortgage (ARM) is worth more than one post.  I last wrote that its great draw—a low initial interest rate—can be worked to a homebuyer’s advantage,  But, I spent more time explaining how the interest rate, being variable, can also be a pitfall.

There are some other features about this type of loan that have a double-edge.

You often hear an ARM called an option mortgage.  The option refers to the type of monthly payment you choose.  Lenders will offer several choices:

1)      Interest only

2)      Minimum payment

3)      Fully amortized

Only the fully amortized option (usually set up for 30 or 15 years) is designed for you to actually pay off the principal of the loan.  (Amortization is the gradual paying off a loan over a scheduled period of time.)  This involves paying back a designated portion of your principal along with all interest accrued each month.  (Paying against the loan principle gives you value—equity—in your property.)  Payment amounts will vary according to your current interest rate.  Also, if you opt (often or even occasionally) to use either of the other payment methods, the amount you pay against the principal will have to be refigured to keep your payoff on schedule.

—Yes, with this type of mortgage you can change your payment type from month to month.  But, the consequence of regularly using the interest only and the minimum payment options of an adjustable rate mortgage is that little or no equity is accrued and negative amortization is possible.  (Negative amortization is an increase in the unpaid balance of loan principal.  This contrasts with equity, which is an increase in the value you actually hold in your property as you pay off the principal. )

Consider:

1)   If interest only payments are made, nothing happens to diminish the principal.    

If this is your practice for the life of the loan, the whole of the principal will be due at the end.

2)   A minimum monthly payment is set in the mortgage contract.  Given that the  

      interest rate will vary, it’s quite likely that making minimum payments will

      not cover the interest owed at any current time, much less reduce the

      principal.  When this happens the monthly excess is added to the principal.  At

      the conclusion of the contract you could owe more money than you originally

      borrowed.

Lenders see a risk of not recouping principal in both these scenarios.  Limits may be set as to how long into the life of the loan these options are available.  However, if you—the borrower—choose to use these payment options, you need to be financially prepared at some point in time to assume fully amortized payments or to make what could be an extremely large payment at the end your contract (a balloon payment).

Paying off a mortgage is a long-term endeavor.  During that time, the status of both your personal finances and the general economy can fluctuate.  Most people, being familiar with charges that are fairly uniform, adjust their whole lifestyle to accommodate financial cycles and continue making payments.  An ARM may allow a homebuyer the luxury downsizing what is likely to be his largest payment—the house payment.  Frequent use of the interest only or minimum payment options can mask serious, deteriorating financial issues that will have to be addressed before the end of the mortgage contract.

The variable (and likely, rising) interest rate of an ARM along with the payment options feature can add to the challenge of successfully buying a house.  However, if you buy property with the intent of a quick resale (and therefore, are unlikely to be long in the mortgage contract) or are familiar and comfortable with large fluctuations in your income that will allow you to make an occasional large payment against the principal, an adjustable rate mortgage (an option mortgage) might be viable.