Category Archives: Buying

How Much Can I Borrow?

Sandy Gadow

Depending on your annual income, cash reserves, credit worthiness, and the appraised value of the property, you may be able to borrow up to 100% of the value of the home.  A typical home mortgage is 80% of the home’s appraised value.  Which loan program fits your needs will also be based on your intended use of the property, whether it will be your personal residence or if you will be using the property for rental or investment purposes.  Lenders typically lend only 70% or 75% of the purchase price for investment or commercial properties. Investment properties may also require additional qualifying criteria and use a different appraisal process.

Why is the appraisal so important?

The amount of money which you can borrow will depend on several factors, but one of the most important is the “LTV” or “Loan to Value” ratio which is based on the appraised value of the property in relation to the amount of money you wish to borrow. A higher appraisal value will normally result in the opportunity for a larger loan amount. For example, most loans are based on a 80% Loan to Value ratio, meaning the lender will loan you 80% of your property’s value.  Keep in mind that this amount may vary for a refinance, an investment property, or based on your credit history or FICO scores.

TIP
Comparables are an important part of the appraiser’s analysis and will be included in the report. You can help the appraiser by supplying all known recent sales in your immediate area,  some which may not yet appear yet in the public records.  In addition, be sure to supply the appraiser with any recent remodeling or major improvements which you have made to the property, and the cost of those changes. Any information on recent improvements in the area, such as new schools, roads, or other community services which will enhance your neighborhood’s value may help the appraiser’s valuation.

How Am I Taxed in an Installment Sale?

Sandy Gadow

Installment sales are used to help spread out capital gains on a property for a period of more than one year. This is done by taking several, smaller payments for the sale of property instead of one large sum of money. A seller may also carry back a note, allowing the tax payments to be deferred.  When a seller takes the option of a wrap around loan, or an all-inclusive trust deed, monthly payments are made from the buyer and the seller is only taxed on the gain earned in one year’s time, which will be spread out over the term of the trust deed.

All Rights Reserved. This article may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

What happens to the mortgage if I inherit the property?

Sandy Gadow

If you inherit a property in which there is a mortgage, under the federal law called the Garn-St. Germain Act, you are entitled to take over payments on the existing mortgage. This act prevents a lender from enforcing the “due on sale” clause which may have been in the mortgage which was on the property.

How Do I Get a Copy of My Credit Report?

Sandy Gadow

If you have been denied credit in the past 30 days, you have the right to request a free copy of your credit report. Beginning December 1, 2004 in the Western states, and nationwide in 2005, the three main credit reporting bureaus, Equifax, Experian and TransUnion will be required to give you, upon request, a free copy of your credit report once every 12 months. Once set up in your area, you will be able to obtain your free copy by calling (877) 322-8228, or on the internet at www.annualcreditport.com. If you prefer, you can write to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Georgia 30348-5281. You are assured of your free credit report by the Federal Trade Commission’s ruling last year under the Fair Credit Reporting Act.

To contact the credit bureaus individually:

  1. Experian
    P.O. Box 2106
    Dallas, TX 75002-9506
    (888) 397-3742
    www.experian.com
  2. Equifax Information Services, LLC
    P.O. Box 740241
    Atlanta, Georgia 30374
    (800) 685-1111
    www.equifax.com
  3. TransUnion, LLC
    Consumer Disclosure Center
    P.O. Box 2000
    Chester, PA 19022
    (800) 916-8800
    www.transunion.com

Related Question

What should I look for in my credit report?

Once you have obtained a copy of your credit report from the three main credit reporting bureaus, look for potential problem areas which could impact your over all credit score. Look carefully for inaccurate information, such as late payments which may be reported which are not correct. It is not uncommon for a creditor to show a delinquent credit card payment, for example, when you are know you have paid your bill on time. You should also check the public records section of your report which will show any tax liens, bankruptcies or default judgments which have been levied against you. Check the credit card accounts listed in the report carefully to be sure there are not any accounts which don’t belong to you. If you find errors, you will want to report them as soon as possible. You can learn more about disputing incorrect information at www.ftc.gov/credit.

Copyright © 2004 Sandy Gadow This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

TIP
Consider ordering your free credit reports one at a time. For example, order your report from Experian one month, from Equifax the next month, and TransUnion the following month.

I Am a First time Homebuyer. Is There a Special Loan for Me?

Sandy Gadow

Many lenders participate in the Community Home Buyer’s Program, sponsored by Fannie Mae, which is specifically tailored for the first-time homebuyer. This type of loan provides financing for low-to moderate-income buyers who might not qualify for a loan on traditional criteria. Under this loan program, you do not need to have a credit history and it allows you to show a willingness to pay by presenting paid utility bills, payments to a landlord, and other sources of credit or services.

An important feature of the Community Home Buyer’s Program is the 3/2 option. This means that you can buy a home with only 3% down of your own funds, instead of the usual 5%, and the reaming 2% can be a gift from relatives or borrowed from friends. Other loan requirements, such as your income-to-debt ratios, are relaxed under this program and you are not required to have a specific percentage of the purchase price in reserve or checking account as required for a conventional loan.

The disadvantage of this program is that there are limits on the amount of the loan you may apply for. To qualify for a loan, you must earn no more than the area median income (with exceptions for specified high-cost areas). You may want to check with your local bank to see if it offers this loan program and what the loan limits are for your area. You can learn more from the Fannie Mae Web site, www.homepath.com (or part of www.fanniemae.com).

Related Question

What is difference between the Community Homeowner’s Program and an FHA Loan?

FHA loans are insured by the Federal Housing Administration (FHA) and are made by qualified lenders which have been approved by the Housing and Urban Development (HUD) agency. The minimum cash down payment is 3% of the value of the home and part of this amount can be used for closing costs. Under a convention loan, or the Community Homeowner’s Program, (a Fannie Mae loan program), the 3% downpayment may be used for the purchase price of the home only. Qualifying standards for an FHA loan typically remain more lenient than for a conventional mortgage. One drawback of the FHA mortgage is the size of the loan allowed. FHA limits are currently $172,632 for most areas, and $496,342 for Alaska, guan and Hawaii. One of the biggest differences between the conventional, Community Homeowner’s Program loan and an FHA loan, is the payment of the mortgage insurance premium (PMI). Under the FHA program, an up-front payment of 1.5% of the purchase is required, although it can be added to the loan. Conventional lenders collect the PMI premium monthly. FHA requires that a home qualify under its standards, which might include requirements such as the roof needing to have a certain amount of economic life remaining.

Copyright © 2004 Sandy Gadow This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

I’ll Fix The Roof After Escrow Closes

Sandy Gadow

Often it may occur that the property you are buying, upon inspection, reveals a problem that needs correcting. The problem may be a leaky faucet, sagging floor, termite damage, defective roof, or any other problems from small to substantial. In the haste to close escrow, a Buyer may agree to let the repair work be done after the escrow has closed. Is there any damage in that? Will the Buyer be protected?

Generally a purchase agreement between Buyer and Seller contains a provision for an inspection of the property, to be made by the Buyer. The Buyer then has a specified period of time, such as ten working days, to approve or disapprove the inspection report. The Buyer most often still wants to go ahead with his purchase, but wants certain defects corrected by the Seller. Some defects the Buyer may be willing to accept.

The best solution is to have the seller correct the problem or defect before escrow closes. Once escrow has closed, it may be very difficult to get the Seller to perform the necessary repairs. The answer to this problem is to have money held back in escrow at closing time. The escrow holder acts as the stake holder of the money, and this money is then be released only after the repairs have been made.

Provision for holding funds in escrow is done by amendments made to the escrow instructions. These amendments must be signed by both the Buyer and the Seller. The escrow closing agent can prepare these amendments for you. The Buyer and Seller could negotiate to split the repair costs, or the Seller may agree to lower the purchase price of the property or the Buyer could agree to accept the property “as is”, thereby accepting the items found in the inspection report.

A word of caution is that once escrow has closed, it may be very difficult to go back after the Seller for repairs. Once the deed is recorded, the Buyer becomes the legal owner of the property and responsible for the property in it’s condition at that time. Title insurance will not cover building defects. A home warranty policy will typically cover only certain items which are found defective and of which the Buyer was not aware existed before the close of escrow.

Related Question

Will the inspection report cover building department permits?

Typically an inspection report will cover only the physical findings of the home inspector, not building permits. If the report does not include an examination of building permits, you can ask that this be done, or you can do it yourself. Building permits are public information. Ask the home inspector to pull all the permits on the property. If there is any new construction which is obvious on the property, and a building permit was not taken out for the work, the construction could be substandard, or you may be required to bring the non permitted work up to code, if you decide to do further renovation work.

Copyright © 2000, 2004 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

What is a Trust and Should I Create One?

Sandy Gadow

A trust is an arrangement which dictates how your assets are to be managed and distributed. Trusts are typically established to save taxes, avoid probate, control trust assets, and protect Beneficiaries. Trusts can be written so that they can be either permanent (irrevocable) or changeable (revocable). There are three parties to a trust: the Grantor, the person who creates the trust by signing a trust agreement and transferring assets to the trust to be managed by the Trustee, the person or trust company, who holds title to the property for the benefit of the Beneficiaries, or the individuals for whose benefit the trust is created.

If the purpose of creating a Trust is to avoid probate and provide for the possible loss of capacity, then the Trust is typically written as revocable or changeable. In a revocable Trust, the Grantor retains the right to change the terms of the Trust or terminate it at any time until death. If the purpose of the Trust is to obtain either present or future tax benefits, then the Trust is typically irrevocable. The Grantor gives up all rights to the property placed in the Trust and would generally be unable to modify or revoke the terms of the Trust.

A trust can be established when one is living (Living Trust) or it can be automatically created upon the time of death (Testamentary Trust). The Living Trust or “inter-vivos” trust is established during a person’s lifetime for the benefit of that person or of other beneficiaries. A testamentary Trust is established under a Will and becomes effective upon death, in which case the will and Testamentary Trust would be subject to probate.

To determine if you should create a trust, consult with your tax advisor or attorney, as each person’s circumstances differ. A qualified advisor can draft your trust agreement tailored to fit your specific needs.

In many cases, trusts help save taxes, help retain control over trust assets, and protect beneficiaries.

This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

How You Close on a Mortgage Is Your Call

Sandy Gadow

By Sandy Gadow
Special to The Washington Post

As the record-setting volume of home purchases and mortgage refinancing continues, many borrowers are becoming concerned about how to make settlement go as smoothly as possible. The right choice of a settlement agent is one way you can speed up your mortgage closing.

The settlement agent is the person who coordinates all the paper-pushing that goes into a closing. Generally, the agent has some sort of connection to a title insurance company.

Closing agents, however, are not all alike. You may have heard that title insurance rates and closing fees can vary from company to company, but you may not be aware of the differences in service you will receive from one company to the next.

Many borrowers also are not aware that they have the right to choose title insurance agents. Under the federal Real Estate Settlement Procedures Act, the seller cannot require you to buy title insurance from a particular title company. The lender may request that you use a title company it finds acceptable, and it likely will recommend some companies, but in most cases you have the choice. The lender usually always agrees with your pick.

This power of choice is a tool you can use to be sure your closing goes as smoothly and quickly as possible. Depending on where you live, you may choose among a title company, an escrow company, a lawyer or a real estate agent. Whichever entity is used, you will want to ask some basic questions before making your choice.

Your choice of closing agent will largely be determined by the state in which you live. In a number of eastern states, a lawyer will probably close your transaction. In the western part of the country, escrow or title companies typically handle closings. In many states, including Virginia and Maryland, as well as the District, there are attorney-assisted closings, title company closings and closings assisted by real estate agents. None of the local jurisdictions require a particular type of closing agent.

Closing is about preparation and service. Expect good service, and ask for it. Making the right choice ahead of time will be the magic key that opens the door to a speedy settlement.

Ask how quickly a title search can be performed. Ask the turnaround time for issuing a title commitment or title report. Ask who will communicate with the lender, appraiser, real estate agent, inspector and lawyer, if one is involved. Some title officers or closing agents don’t have assistants to help them get the reports out quickly. They can become bogged down with files, and yours may be on the bottom of the stack.

Ask if the title company or agent uses a “transaction-management system” or other means of internal or Internet software system to transmit information, or even documents, electronically. Many lenders have what is called “digital document delivery systems,” which means they can transmit your loan documents to your closing agent by way of the computer. The title company can receive your loan documents almost instantaneously. Funds to close escrow can be received electronically.

What this means is that if there is a change to the documents, a last-minute correction or addition, it can be handled within minutes.

When selecting a title company or closing agent, ask if they use this means of rapid document delivery. Ask if they use a system of instant communication for reports and documents. Ask ahead of time what kind of service you can expect.

The five major national title insurance companies are Fidelity National Financial Inc., First American Corp., LandAmerica Financial Group, Old Republic Title Co. and Stewart Title Co. Among them, they issue about 90 percent of the title insurance policies, said James Maher, executive vice president of the Washington-based American Land Title Association. Regional and one-state companies handle the remaining policies, he said.

All the national companies have transaction-management systems in place. This is important because information can be exchanged, approvals obtained and errors corrected almost instantaneously. In some cases, title reports can be read on a hand-held communication device or on cell phones so that most of the parties to the settlement have access to the information. In some cases, home buyers and sellers as well as professional service providers can log in.

Many regional insurers and larger closing agents have their own systems.

If you use a lawyer to handle your closing, you will want to ask how frequently the law office handles title searches, how large the staff is that will process your file and how quickly the closing date can be arranged.

Many law offices do not rely on real estate closings as a primary source of income, but rather as a way to accommodate clients or to generate further business. Be sure your lawyer has the staff available to quickly process your file. Ask if the lawyer will provide the closing documents to you one day before closing.

Many borrowers arrive at a closing only to find the lawyer or closing agent reading through the documents for the first time. Make it clear that you would like your closing documents to have been read and reviewed before you come in for signing. If there are discrepancies, these can be resolved before closing.

Do not be afraid to exercise your power of choice. Even if your lender recommends you use the title company that normally handles its closings, get several quotes on your own.

If you find a closing agent or title company that offers you a savings on title insurance, closing costs, title exam, search or courier fees, let your lender know. They may agree to match those cheaper fees. Get your quotes in writing, and present them to your lender. Your savings could be substantial.

You may be entitled to a discounted rate on your title insurance policy. If the previous title policy was written in the past two to five years, ask if you qualify for a “reissue rate.” Title companies may not offer the discounted rate unless you ask for it. The savings could be 20 percent or more of the original title policy, so be sure to ask.

Compare reissue title rates. Lawyers are not regulated by the state’s insurance agency and may charge a different rate from that of a title company. Similarly, reissue rates may vary from title company to title company.

This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

What Are Fannie Mae Guidelines and Will I Qualify?

Sandy Gadow

Your lender or mortgage broker may refer to “Fannie Mae Guidelines” when asking you for documentation supporting your loan application. They may have explained to you that you must qualify for the loan under those guidelines. What are they and will you qualify?

Fannie Mae is short for the Federal National Mortgage Association. Fannie Mae is the country’s second largest corporation and was established by an act of Congress in 1938. Fannie Mae was created to bring stability back to the housing industry after the depression. In 1968, Congress re-chartered Fannie Mae as a private company. Congress mandated that Fannie Mae operate with private capital, be self-sustaining, and enhance the flow of funds through the secondary market to homebuyers. It operates under a federal charter, which is called the Federal National Mortgage Association Charter Act. This act places certain rights and responsibilities on the company.

Fannie Mae does not directly loan money to you, the “primary” Borrower, but rather loans money in the “secondary market”, or to lending institutions. In short, by lending money to your lender, this frees up capital for your bank so they can go on to make more loans.

In order for Fannie Mae to buy single family home loans from mortgage bankers, savings and loan associations, commercial banks, and other financial institutions, the loans must conform to their set of “Fannie Mae guidelines.” Together with an acceptable credit score, they require certain “debt to income ratios.”  These ratios are calculated as a percentage made up of of your monthly gross income in relation to how much goes toward housing expenses and to servicing such debt as auto loans, credit cards, home loans, and credit lines.  You must be able to prove your employment and document your assets and liabilities (debt). Normally you will be required to verify two years employment. If you have a 25% or greater interest in a business, you would be considered self-employed. An accurate and reliable appraisal will be required. Fannie Mae requires that lenders use an appraiser who is licensed following their guidelines.

Fannie Mae only deals with mortgages made to individuals. A corporation or general partnership would not qualify for a Fannie Mae loan. Fannie Mae will allow a mortgage that has a co-borrower, and that person is not required to take title to the property. The income from the co-borrower will not be accepted for qualifying purposes, unless that person also signs on the promissory note.

Loans made for your principal residence, second home, or an investment property, all may qualify under a Fannie Mae loan program.

Fannie Mae sets loan limits with are linked to the Federal Housing Finance Board’s October single-family price survey. These loan limits are adjusted each year in accordance with the results of this housing survey. For example, the current loan limit for a single family residence is $417,000. (except in Alaska, Hawaii, and U.S. Virgin Islands, which carry a 50% higher limit). Loans made within Fannie Mae loan limit guidelines are termed “Qualifying” or “Conforming” loans. They generally carry lower interest rate levels than “Non-Conforming” or “Jumbo Loans.”

Copyright © 2012 Sandy Gadow This column may not be resold, reprinted, resyndicated, or redistributed without the written permission of Escrow Publishing Company.

Related Questions

How do I calculate my debt to income ratio?

There are two types of ratios which Fannie Mae uses to determine the eligibility of your loan.  The first or “front end” ratio is measured by dividing your proposed total monthly housing expense (principal, interest, taxes and insurance) by your gross monthly income. The second ratio used is your “back end” or total monthly obligation-to-income ratio. The current acceptable standard is 28% for the front end and 45% for the back end. (28/45). You can calculate these ratios yourself to see where you stand.

Your total monthly payments (back end) will include the following:

  • Mortgage payments, including principal, interest, taxes, insurance and association dues.
  • Revolving credit card accounts (include the minimum payment on accounts)
  • Co-signed loans
  • Child support
  • Note: You do not have to include: utilities, telephone, auto insurance or childcare.

What if my debt-to-income ratio is too high?

The following strategies can improve your debt-to-income ratio.

  • Make a larger down payment. By making a larger down payment, your monthly payment will go down and lower your debt to income ratio.
  • Buy down the mortgage rate. Ask about paying extra or “buying down” the interest rate on your mortgage. A lower interest rate will result in a lower monthly payment and reduce your debt ratio.
  • Consider a Co-Signer. A co-signer can add to your income which can help improve your ratio.
  • Renegotiate with the Seller. If the above options are not possible, you can try negotiating with the seller for a reduced sales price.

What is a Jumbo Loan?

A jumbo loan is the same as a non-conforming loan. It is any loan which is made by an institutional lender which exceeds the Fannie Mae or Freddie Mac guidelines for a conforming loan.

TIP

You will save about a half percent in the interest rate on a conventional loan versus a jumbo loan, so if you can stay within the guidelines, it would be worth it.

Do I Need a New Title Policy When I Refinance My Mortgage?

Sandy Gadow

You will not be required to obtain a new Owner’s Title policy when you refinance your mortgage, but you will be required to obtain a new “Lender’s policy” of title insurance, naming the lender as the insured. The Lender’s Policy of title insurance protects the lender for the amount of their mortgage loan. The new policy is required because any number of things could have happened to the property since the time of the last title search. Such events as tax liens, liens for unpaid child support, or mechanic’s liens can occur without the homeowner even being aware these liens exist. You may feel certain that nothing has changed since you originally purchased or refinanced your property, but the lender will have to have assurance from the title company that everything has been done to certify that the loan is fully protected. It is the lender who requires the new loan policy of title insurance and in order for a title company to issue this new policy, a new title search must be performed.

Related Question

How Often Can I Refinance my Mortgage?

You can refinance your mortgage as often as you like, however, many lenders require that you have lived in the property (“seasoned”) the property for at least one year before granting a new loan. Lenders may also require that you hold a loan one year before refinancing to a new loan. You will want to carefully read the “Prepayment Clause” in your mortgage documents, to determine if you will have a penalty to pay if you pay off the old loan before the maturity or due date of the loan.

TIP
You may qualify for a discounted rate or “re-issue” rate on this new title insurance policy if your previous policy was issued in the last 2-5 years. Ask your title company or escrow officer if you qualify.

Why Is My FICO Score So Important in Getting a Mortgage?

Sandy Gadow

Most lenders rely on a credit score, called a “FICO score” to determine a Borrower’s credit worthiness when applying for a mortgage. Your FICO score or number may determine what type of interest rate and loan program you are likely to be offered from any one lender. Each lender may have different guidelines and requirements to fit their individual loan programs. Your FICO score is comprised of a compilation of your credit history from the three major credit reporting bureaus, Equifax, Transunion, and Experian. Since each credit bureau may collect your credit data differently, an average score of the three bureaus is deemed the most accurate. In general terms, a score of 720 or better will mean that your credit risk is very low and you may be offered a preferred low interest rate and several loan program options. A FICO score in the range of 660 to 719 is still acceptable for several different loan programs. A score of 620 to 659 indicates a Borrower shows a higher degree of risk to default on a loan, so different guidelines may apply than for a Borrower with a higher FICO score. Under 619, a Borrower is generally considered a high risk for default. A high risk Borrower may still qualify for a loan, but the interest rate or terms may not be as favorable as of those offered to a low-risk Borrower.

How do I establish credit to qualify for a mortgage?

If you are a young Borrower, or a new Borrower, with little or no credit history you can establish credit by working for two years, paying off something small, like a student loan each month, and get one debit card and pay it off each month.

Most lenders rely on a credit score, called a “FICO score” to determine a Borrower’s credit worthiness when applying for a mortgage. Your FICO score or number may determine what type of interest rate and loan program you are likely to be offered from any one lender. Each lender may have different guidelines and requirements to fit their individual loan programs. Your FICO score is comprised of a compilation of your credit history from the three major credit reporting bureaus, Equifax, Transunion, and Experian. Since each credit bureau may collect your credit data differently, an average score of the three bureaus is deemed the most accurate. In general terms, a score of 720 or better will mean that your credit risk is very low and you may be offered a preferred low interest rate and several loan program options. A FICO score in the range of 660 to 719 is still acceptable for several different loan programs. A score of 620 to 659 indicates a Borrower shows a higher degree of risk to default on a loan, so different guidelines may apply than for a Borrower with a higher FICO score. Under 619, a Borrower is generally considered a high risk for default. A high risk Borrower may still qualify for a loan, but the interest rate or terms may not be as favorable as of those offered to a low-risk Borrower. To order a copy of your FICO score, contact Fair, Isaac Corporation at: www.myfico.com

TIP
To improve your FICO score, avoid opening new charge accounts, buying a car or furniture on time or looking on the internet for low rate credit deals between the time when you receive a loan commitment and the time you close.

Copyright © 2003-4 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Related Question

 

What are the three types of easements?

Sandy Gadow

Many properties have easements, often laid out when the subdivision was created. These easements may be for public utility or power lines, phone lines, water pipes, sewers pipes, gas lines and often cable TV. There are three common types of easements.

1. Easement in gross

In this type of easement, only property is involved, and the rights of other owners are not considered. For example, a public utility line easement would be an easement in gross and would be recorded in the public records.

If for any reason the title insurer fails to disclose a properly recorded easement in gross, and which then causes a problem later, then the title insurer must either pay you the diminished value of your property, or have the easement moved.

2. Easement appurtenant

An example of an easement appurtenant would be an easement allowing you to drive over your neighbor’s property to in order to reach your property.

An easement by necessity can be created for a landlocked parcel that has no public road access. To create an easement appurtenant by necessity, the owner of the landlocked parcel must be able to prove in court that there was common ownership with one of the joining parcels that has public access.

3. Prescriptive Easement

A prescriptive easement arises if someone uses part of your property without your permission. A prescriptive easement involves only the loss of use of part of a property, for example a pathway or driveway. Payment of property taxes is not required, as it is to obtain title by adverse possession. Adverse possession of a prescriptive easement involves the loss of an entire property by open, notorious, hostile adverse and continuous use.

The legal test to acquire a prescriptive easement of another owner is that the use must be (a) open, not secret, (b) notorious, clearly observable, (c) hostile, without the landowner’s consent and (c) continuous, without interruption for the number of years required by state law. For example, the minimum hostile use varies from 5 years in California to 30 years in Texas.

The most common prescriptive easement arises when a fence is erected several feet on the wrong side of a boundary line. If the hostile user meets all the requirements, after the required number of years, a permanent prescriptive easement results for the strip of land. Prescriptive easements can be shared, that is, the hostile use need not be exclusive. Use can be shared with the legal owner and/or other hostile prescriptive claimants.

To perfect a legal prescriptive easement, the hostile user must bring a quiet title lawsuit against the property owner and prove all the open, notorious, hostile and continuous use requirements.

If, after purchasing your property, you suspect that a neighbor is using land with belongs to you, that person or neighbor being a “hostile user”, you can choose to grant permission to your neighbor thus preventing a permanent prescriptive easement from arising. Permission should be documented such as by a letter to the hostile user.

This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Finding Hidden Costs on Your Closing Statement

Sandy Gadow

Throughout the closing process, you will have been given various documents, some being mandatory government disclosure documents. These disclosures are meant to keep you fully informed in regard to the costs you will or may incur in your closing. Among these documents may be a Good Faith Estimate of Closing Costs and a HUD-1 Statement. You could also receive an explanation of mortgage broker fees, if you engage a mortgage broker to help you find a loan. Many of the fees disclosed may overlap or be the same fees, such as an appraisal fee, origination fee, escrow fee or title insurance fees.

There are other fees, such as courier fees, notary fees, documentation fee, overnight delivery fee, points, processing fee, which may be duplicates of other fees, or which are fees which the originator has marked up to add to it’s profit margin. These are the fees, sometimes called hidden fees, which you may overlook or not feel you have the right to question. You do have that right.

Let’s look at the fees typically disclosed on the Good Faith Estimate form. This is the document which you will first receive if you are applying for a federally related mortgage loan. It’s purpose is to give you an estimate of the loan fees you might have to pay at closing. You will want to compare the fees found on the Good Faith Estimate form with those fees listed on the HUD-1 Closing statement, which is given to you at the time of closing. A few of these fees, such as the credit report fee or the appraisal fee may be required to be paid prior to the closing, but in general closing costs are paid at the time the sale is finalized. It is wise to question the fees listed on the Good Faith Estimate form, as once stated on the HUD-1 Closing statement, changes may delay the closing or you may feel it is too late. A delayed closing may require loan documents to be redrawn, the move-in date to be changed, or one of the parties in the transaction may not be available for signature.

The first category of charges listed on the Good Faith Estimate Form are those items payable in connection with your loan. These may include an origination fee, points, appraisal fee, credit report fee, mortgage broker fee, underwriting fee, processing fee, courier fee, and wire transfer fee. An origination fee and points are typically a set fee which you have agreed to pay in order to obtain your loan. It may be a percentage of the loan amount, say 1%, or it may be an agreed on amount. In some instances, the lender may not charge either of these fees. The origination fee and points are deductible as an expense item in some instances, but must be amortized over the life of the loan in others. You will want to weigh your options when agreeing to pay this fee. Oftentimes, you can “buy down” or reduce your over-all interest rate by agreeing to pay points. Take into consideration the length of time you will anticipate keeping the loan and weigh the benefits of paying these fees.

An appraisal fee and a credit report fee are typically not negotiable, as the lender or your mortgage broker will order these. Even though you may have an appraiser which you like and will offer you a reduced fee to perform the appraisal, the lender may require that the appraisal be performed by one of their “approved” appraisers. If you do, however, have an appraiser which is considerably less costly than the lender’s appraisal company, you appraiser can typically become certified by your lender by a simply providing the lender with certain licensing certifications. Using your own appraisal company may save you several hundred dollars in appraisal fees.

The mortgage broker fee listed on the Good Faith Estimate form is a negotiable item, a cost which you and your mortgage broker will agree upon when you apply for your loan. The lender’s inspection fee and underwriting fee and processing fee may be somewhat negotiable, but many lenders stay fairly firm on these fees. You can always ask and see if they will reduce them down or waive them altogether.

Courier and wire transfer fees are typically charged for transferring loan documents to the escrow closing company and wiring the loan proceeds to the closing officer. You may ask that these be reduced or waived. Ask if your lender has the ability to transfer the documents electronically. This may save you on these fees. Also be sure to verify that the closing agent has not marked up these fees at the time of closing.

The next group of fees listed on the Good Faith Estimate form are items required by the lender to be paid in advance and reserves required to be deposited with the lender. Look these other carefully, checking the calculations and comparing the figures with the amounts you were quoted for interest, mortgage and hazard insurance. Verify the property taxes.

Following the reserves required to be deposited into escrow, the government recording and transfer charges will be listed. These are fees which the government charges to transfer the property and record your loan and purchase and they are not negotiable.

The next list of charges may be survey fees, pest inspection or property inspection fees. Verify that these fees are exactly what you agreed to pay. Remember to look for any credits which the Seller agreed to give you on these costs. Many of these inspection fees are negotiable, and either Buyer or Seller may pay them.

The last category of closing fees are the title charges. These relate to the fees charged by the title or escrow company closing your purchase. There will be a settlement or closing fee, an abstract or title search fee and a title examination fee. Ask about these with your closing agent and ask if any of them can be reduced. The title insurance fees will then be listed. Be sure to check if you qualify for a “re issue rate” or a reduced fee. Oftentimes when title on a property has recently been searched, within the last two to five years, the title company will offer a reduced rate. If your transaction is a refinance, the lender may allow you up to a 60% discount off the standard published title insurance rate. Keep in mind that title insurance rates are state specific, and some states may impose a minimum title insurance fee, while others may not.

The next listing of fees will include a document preparation fee, notary fees, attorney fees, and other miscellaneous fees. Look these over carefully. Notary fees can be waived and attorney fees should be the same as you agreed upon initially. If these fees change, question the reason for the adjustment.

While questioning your closing costs takes some time and effort, you have the opportunity to save several hundred if not thousands of dollars at closing time. The small fees of $75 up to $300 may seem somewhat insignificant in relation to the total purchase of your new property, but when added together, they can make a difference. Every savings you make at the closing will be money well spent. This money can be used for repairs, remodeling, or furture expenses that come with owning a property.

Copyright © 2002 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Related Article

How can the Right of Rescission Protect Me?

Sandy Gadow

The Right of Rescission is a protection given to borrowers under the Truth in Lending Act. This right gives borrowers of certain types of loans the opportunity to cancel their loan within 3 business days of signing the loan documents and qualify to receive a full refund of any monies paid. In your rush to refinance your home or to take out a personal loan, using your home as collateral for the loan, you may have second thoughts or want more time to shop for other financing options. This act gives you extra time to carefully consider your new loan. Sometimes called a “cooling off” period, it allows you those 3 extra days to be certain the loan is exactly what you expected.

In order for the loan to fall under the Right of Rescission protection laws, the loan must be to refinance a loan on your home with a new lender, or a refinance in which you will take cash out, over and above paying off the old or previous mortgage. The right of rescission does not apply in all cases where your home is used as collateral for the loan. You do not have the right of rescission when: you apply for a loan to purchase or build your principal home; you consolidate or refinance with the same lender who already holds the mortgage on your home when no additional funds are borrowed, or when a state agency is the creditor for your loan. If you are increasing the size of your loan, refinancing with a new lender or taking out a loan against your home, you can cancel the entire transaction within the 3 day rescission period. Whether your home is a condominium, a mobile home, or a house boat, as long as it is your principal residence, the right of rescission will apply. The right applies to certain installment loans, in which you borrow a fixed amount and repay the debt on an agreed payment schedule as well as to home equity credit lines.

You have the right to “rescind” or cancel your credit transaction until midnight of the third business day after the loan documents are signed. The mortgage or Deed of Trust will not be recorded until the 3 day waiting period is over. The first day is considered the day you sign the credit contract. You will receive a Truth in Lending disclosure form containing certain important disclosures about the credit contract. These disclosures explain the key terms of the credit being offered: the annual percentage rate; the finance charge; the amount financed; the total of payments; and the payment schedule. You will be given two copies of a notice explaining your right to rescind. For rescission purposes, business days include Saturdays, but not Sundays or legal public holidays.

During this waiting period, your lender will not take any action on your transaction, nor will you receive the proceeds from the loan until after the 3 day period has expired. If you do decide to exercise your right of rescission and cancel the loan, you will be required to notify the lender, in writing, that you are canceling the contract. You may use the form provided by the lender, or by writing a letter or telegram. Whichever form of written notice you use, make sure it is delivered, mailed, or filed for telegraphic transmission before midnight of the third business day. Keep in mind that to qualify, you must follow the written procedures and not just notify the lender by a telephone call or a visit to the lender.

Within 20 calendar days after receipt of the notice of rescission, your lender will be required to return any money or property that was given to anyone in connection with the loan and will be required to take any action necessary to reflect the termination of the security interest.

Related Question

Will the appraisal fee and all title and escrow fees paid also be refunded to me if I rescind my refinance mortgage?

The Federal Truth in Lending Act guarantees your right to a refund of ALL fees you have paid in advance of obtaining the refinance mortgage if you rescind the loan. These fees include the appraisal fee, title search fee, escrow fees, any inspection fees.

Copyright © 2002, 2004 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

What is the Tax Exclusion Rule for the Sale of a Residence?

Sandy Gadow

The Taxpayer Relief Act of 1997 has replaced the old Rollover Residence Replacement Rule, IRS Code Section 1034, which allowed you to avoid paying tax on your profit from the sale of a principal residence so long as you bought a replacement residence within 24 months before or after the sale. It also replaces the old IRS Code Section 121 which allowed for a one-time exclusion to sellers who were over 55. The act applies to all sales on or after May 7, 1997, and allows a $250,000 ($500,000 for married couples) exclusion from the tax on the sale of your principal residence. You no longer need to buy another house of equal or greater value to claim the exclusion.

There are a few guidelines you need to follow to take advantage of this ruling. You may use it repeatedly but not more frequently than once every two years. The property must be your principal residence, not a second residence or a rental property. The residence may be in or out of the United States. It may be a detached house, a mobile home, a co-op apartment, or a condominium. You cannot have more than one principal residence at the same time.

There is a special provision in this 1997 Tax Act which allows both spouses to claim up to $250,000 of tax-free profits, even if one spouse is not living in the residence. For example, if an ex-spouse lives in the family home for at least two of the five years before the sale, then the nonresident spouse can also qualify for up to $250,000 of home sale tax exempt profit. However, the law requires that both spouses file a joint tax return in the year of the home’s sale, if not, then only a $250,000 tax exemption would be allowed to the spouse who hold title. There is also a special provision for a surviving spouse. The surviving spouse is allowed to claim up to $500,000 of principal residence sale tax exempt profit if the home is sold in the year of the other spouses’ death. In the event where two or more unmarried co-owners each meet the ownership and occupancy requirements, each co-owner may also claim up to $250,000 of tax exempt profit when the home is sold.

This exclusion virtually eliminates most record-keeping requirements when you know for certain that you will not experience a gain of more than $250,000 ($500,000 for married couples) on the sale of your residence. Your escrow or title company is no longer required to file Form 1099-S, which reported these qualifying home sales to the IRS. The new act did not change the rules concerning a loss on the sale of your residence. If there is a loss, it is still not tax deductible.

Related Questions

What are the rules if I acquired my residence in a like-kind exchange?

As of October 22, 2004, the American Jobs Creation Act of 2004 does not allow any tax exclusion if you sell your home within five years in the case where you have acquired the property through a like-kind exchange. Normally, a taxpayer would be allowed a tax exclusion of $250,000 ($500,000 for married couples) deduction if the property was used as a principal residence for at least two out of the five years before the sale. Taxpayers who convert rental property to a principal residence should be aware of this tax law change, which could limit their ability to exclude the gain on the sale of the residence.

What is the special tax treatment for the sale of a residence in California?

Proposition 60, which was approved in 1986, allowed persons 55 years of age or older who sell their principal residence and buy or build another residence of equal or lesser value within two years to transfer the old residence’s assessed value to the new residence, provided that the replacement residence was within the same county as the original residence. In addition, this program allowed the transfer of assessed valuation to a replacement dwelling located in a different county, provided that the county in which the replacement dwelling is located had adopted an ordinance allowing intercounty transfers of assessed value.  The program was expanded in 1988 by Proposition 90 which allows counties to make this program available to seniors moving in from another county.  Proposition 90 is considered a “local-option” law in that each county has the option of participating. If a county has adopted a Proposition 90 ordinance, it accepts transfers of property tax base assessments from other California counties. If the county that the homeowner is moving from does not have a Proposition 90 ordinance, this does not affect the eligibility of the homeowner.  A homeowner may benefit from this program only once from this tax exemption provision.

For specifics on this tax exemption program, go to the Los Angeles County Assessor’s website.

Is there a special tax exemption in California for property transfers between parents and their children?

Parents and grandparents are allowed to transfer the family house and other property to their children or grandchildren without property tax consequences. Proponents of the program argue that transfers within the family deserve special treatment in order to preserve family homes, businesses, and farms.  Proposition 58 was passed  in 1986 and was expanded by Proposition 193 in 1996  to provide a substantial reduction in property taxes for children or grandchildren who inherit (or otherwise receive) homes, farms, and other real property from their parents or grandparents if the property has been held for several years or more. In these cases, the property’s assessed value may be significantly less than its current market value. There is no income limitation or other “needs test” for participants in this program.

This program exempts from reappraisal a property holder’s principal residence, and up to $1 million in other real property, when the property is transferred between (1) parents and children, or (2) grandparents and grandchildren, provided that both parents of the grandchildren are deceased. This exemption from reappraisal provides that the transferred property retains the taxable value that it held prior to the transfer.
Refer to the California State Board of Equalization’s website:  http://www.boe.ca.gov/proptaxes/faqs/propositions58.htm for specific details.

Copyright © 2002, 2004, 2006 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

TIP
To prove occupancy as your principal residence, be sure to file your tax return from the residence. Voting and a driver’s license in the state is not enough proof to establish residency for the tax exclusion rule.

What is the First of the Three Most Important Documents My Escrow Officer Will Need?

Sandy Gadow

Your escrow officer or closing agent will refer to three main documents to act as the roadmap to prepare your purchase transaction for closing. Those three documents will be the Purchase Agreement or contract between Buyer and Seller, the title commitment or abstract of title, and the lender’s closing instructions.

The Purchase Agreement will reveal the Who, What, Where, When and How of your transaction. It will list who the Buyers and Sellers are and which Real Estate Agents are involved and the amount of commission due each agent. It will state the name of your lender, if that is known at the time the agreement is given to the escrow officer, and it may list the name of the title or escrow company who will handle the closing.

The Purchase Agreement will next spell out the What of the transaction by describing the legal description of the property and listing any personal property items which will be involved in the sale. The property address will identify the where portion of the purchase. The date of acceptance of your purchase offer, the date when the evidence of title must be delivered, the date a loan approval must be made, the closing date, and the date for making prorations fulfill the when requirement of your closing and make clear the specific dates when events must occur.

The terms of the transaction will explain the how aspects of your closing. The purchase price, downpayment made, loan amount, terms of the financing, the balance due at closing and any contingencies to the contract will all be listed in the purchase agreement.

Who the current lender is and the loan number may be outlined in the Purchase Agreement. Who will hold the downpayment or earnest money is listed. This may be either the sales agent, title company, or a third-party. Who will pay for what costs involved in the transaction will be listed. Such fees as recording fees, title insurance, survey, termite report and inspections fees will be spelled out. Who will pay for the real estate commission, loan costs and any other miscellaneous fees will be detailed. Further specifics of how your escrow will be closed will explain who is responsible for ordering such services as a survey, termite report, and roof or structural inspections.

The final portion of the purchase agreement will tell the escrow officer what will happen if certain events were to take place. These occurrences could be the buyer not being able to obtain financing, one or the other party defaulting on the contract, the seller not being able to transfer clear title, the purchase not closing on the agreed closing date, or termite or other inspections showing damage that the Buyer is unwilling to accept.

You may wonder what happens if one of the parties to the transaction have special requirements which are not covered in the pre-printed Purchase Agreement form. When the Buyer, Seller, Lender or other party to the purchase needs to make a change or needs to change the language to the contract, they may choose to attach a separate addendum or addition to the contract to provide for these special requirements. When changes are made to the contract, these changes should be initialed by all parties to the contract. Any changes made to the instructions to your closing agent will need to be agreed upon between all parties to the contract and their acceptance evidenced in writing. Keep in mind that any typewritten or handwritten provisions added into the contract or attached to it by way of an addendum will supersede the pre-printed language in the contract.

Related Questions

Can the terms of the Purchase Agreement be changed after they are signed?

Often a case may arise in which one or more of the terms in the Purchase Agreement must be changed. Once submitted into escrow, the Purchase Agreement is the over riding document which specifies the terms of the sale. In order to make a change, or add to this agreement, an addendum can be prepared and signed by both Buyer and Seller. The closing date may need to be revised, acceptance of certain inspection reports may need changing, or financing contingencies may need to be modified. As long as both parties to the agreement mutually consent to the modification, the Purchase Agreement can be changed.

What is a contingency?

A contingency is a clause written into the Purchase Agreement which allows either the Buyer or Seller to cancel the agreement, unless certain events take place. The most common contingency is a financing contingency, which allows the Buyer a specified number of days in which to find acceptable financing. Inspection contingencies are common, giving the Buyer an opportunity to approve or disapprove a building inspection or other inspection reports. There are a number of common contingencies, such as the Seller being able to provide clear title to the Buyer, which are written into every Purchase Agreement. As each contingency is removed, written verification is sent to the closing agent, who adds it to the escrow file. Contingencies generally hold time limits to perform a task, which then requires approval or removal.

Copyright © 2001, 2004 Sandy Gadow. This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

For Tax Purposes, What Is The Best Time To Buy My House?

Sandy Gadow

Knowing when to close your real estate purchase can work to your advantage at tax time. You may want to consider postponing your December closing until January of next year, if it will benefit you on your tax return. You would make this determination in several ways.

First, you need to review your tax liabilities for the current tax year with your tax accountant or tax preparer and see if taking additional deductions in the current or future year would be most beneficial to you. Next, you will need to understand which items in your closing will be tax-deductible and which items will added to the value of the property. Keep in mind that if you close on December 31 rather than on January 2 (or the first business day after the New Year), you will be permitted to take the allowable deductions for your home purchase in the year purchased, even if your closing occurs on the last day of the year. If you want to increase your deductions for the coming year, then you may want to choose to close in January. The normal allowable home purchase deductions will be the points, interest, and property taxes which you pay.

If you will be obtaining a mortgage on the property and will be paying points, this expense will be an allowable tax deduction. A “point” is the fee which represents 1% of your loan amount and may be charged by your lender or mortgage broker. The number of points you pay may vary from lender to lender. Points are referred to as a “nonrecurring closing cost,” and are fully deductible in the year paid. You should be aware that points on a refinance loan are not deductible in the year paid, but rather must be amortized and deducted over the life of the loan. There are certain other exceptions, such as the loan must be secured by your main home, but generally, the points will be allowed as a deduction in the year paid.

Prepaid and prorated interest is also deductible in the year paid and refers to the interest you are charged from the date of your closing to the beginning of the period covered by your first mortgage payment. As a reminder, keep in mind that mortgage interest and principal payments are paid in arrears. For example, if your closing takes place on December 10th, your first monthly payment would begin to accrue on January 1st and would be payable the beginning of February. You probably would be required to prepay the interest form December 10th through the end of December. If your closing occurs later in the month, you would pay less at the closing than if you had closed the first of the month. The amount of prorated interest you will be required to pay may be something for you to consider when choosing a closing date. Your lender will send you a 1099 form at the end of the year which will list the interest paid for the year. Be certain that it includes the prorated interest which you paid at closing.

Any prorated property taxes will also be an allowable expense item. The property taxes on the new property which you are purchasing will be prorated at closing and your portion will be allowed to be deducted as an expense for income tax purposes. Your escrow officer will calculate the tax prorations by dividing the taxes between you and the seller, based on the due date for the property taxes in your state. If the seller has paid the property taxes beyond the date of closing, the seller will be credited for this expense. If the taxes have not yet been paid, the amount owed will be charged to you and added to your closing costs. Your lender may require that the taxes be paid in full at closing, or they may be certain that they collect enough to cover the taxes until the next pay period. Any delinquent taxes which were due and which you may have agreed to pay, would not be a deductible expense. You would need to treat any delinquent taxes which you pay as part of the cost of your home. Keep in mind that some special government fees, such as water or sewer assessments, may not be deductible. Check with your accountant or refer to the IRS Publication #530 for which law applies to your circumstances.

You will want to assess your tax liability for the current and future year, to determine if it is in your best interest to close in 2000 or 2001. Keep in mind that once you purchase your property, you may want to choose to itemize your deductions on your tax return, if you have been taking the standard deduction previously. If your itemized deductions, which includes your mortgage interest and property taxes, do not exceed the standard deductions, you may be better off taking the standard deduction. Each individual has unique tax circumstances and your tax accountant or preparer will know what is best for you.

If you do decide to close on the last week of the month, be aware that this week is typically the busiest time for title and escrow companies. Be sure to schedule your closing well in advance of your closing day and notify your attorney, lender, seller, escrow officer and any other participants in the closing of the closing date which you choose. If you would like to investigate further which items will be tax deductible and which items will be added to the cost of your home, you may refer to IRS Publication #530, “Tax information for First Time Home Buyers.”

This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.

Related Question

Are the points paid on a refinance loan also tax deductible?

The points paid on a refinance mortgage are not deductible in the year incurred, but rather can be deducted over the life term of the loan. For example, if you paid $1,500 in points on a 30 year mortgage, you could deduct $50.00 per tax year for the next 30 years.

Will The Builder Pay for the Owner’s Policy of Title Insurance?

Sandy Gadow

In many states it is customary for the Seller to provide the Buyer with an owner’s policy of title insurance. It is then the responsibility of the Buyer to purchase the policy of title insurance covering the lender. Customarily, the two policies of title insurance are issued “simultaneously” by the same title company and the Buyer profits from obtaining a discounted or “simultaneous issue” rate on the lender’s policy.

When purchasing property from a builder, you may find that the Builder is paying a special rate of only $25-$35.00 for the Owner’s Policy of title insurance and you will be paying a full non-discounted rate for your Lender’s policy. This is a common practice in many states in new construction. Title companies often file this Builder discounted rate of $25-$35.00 with the state insurance division for their state. After all, Builders may bring quite a bit of business to the title company and the title search may take a shorter amount of time than normal, allowing for a discounted rate.

You might want to try negotiating with the Builder on the payment of title insurance fees. Ask what rate you will be paying for the lender’s policy of title insurance. If you are being required to pay the full, non-discounted rate, you may be able to negotiate and arrange for the Builder to pay for a portion of this higher rate.

Although many builders may insist that it is customary for the Buyer to pay for all title insurance closing costs in new construction, keep in mind that title insurance fees are negotiable. Be sure to make your negotiations with the Builder clear before you sign the Purchase Agreement.

This column may not be resold, reprinted, resyndicated or redistributed without the written permission from Escrow Publishing Company.