The Home Buying Process

Part I

The Home Buying Process

Step 1: Determine Your Real Estate Team

Identify an attorney who will assist you in the process.  Having a knowledgeable real estate attorney can save you money and give you peace of mind throughout the process.

Obtain a pre-approval from your mortgage consultant.  You should have a synergy with the team that you choose as your purchase may be a long drawn out process.

Contact a real estate broker who will assist you in locating your new home.  Some factors you may want to consider are the real estate broker’s knowledge of the area which you are looking to purchase and the amount of homes the realtor sells in a given year.

Step 2:            Locating a Home

Whether you locate a home through your own efforts or through the efforts of a realtor, purchasing a home is one of biggest decisions you will make in your life.  Factors that one considers in purchasing a home vary based upon location, size of the home, size of the family, and budget.   Carefully evaluate the factors important to you because the home you are about to purchase will in all likelihood be the home you are going to reside for a number of years.

Step 3:            Term sheet

The parties agree on a purchase price.  If a realtor is involved, a “binder” form is completed, which identifies the parties, the financial information, and the property and is forwarded to the attorneys, realtors, and parties.  If no realtor is involved contact your attorney to discuss the terms of the deal.  Be sure to have all the necessary information relevant to the term sheet.  Your preapproval that you obtained would be useful to the Seller here.

Step 4:            Perform a Home Inspection

A home inspection is a useful informational tool that will permit you to make an informed decision about purchasing your home.   A home inspection is the last chance you have to negotiate your contract price or request repairs of the seller.

A home inspector is an independent, qualified, licensed individual who evaluates or comments about defects or areas of concerns for the structural components and mechanical systems for the home you are about to purchase.

Some of my clients tell me that they do not want to spend the money on a home inspection or have a family member that is in the business and attempt to waive the home inspection in order to save money.  For a few hundred dollars, you can save thousands of dollars based upon the information given by the inspector.  Even more importantly, you may not want to purchase a home after you read an inspector’s report.  In some cases, you may want to renegotiate the price of the home after the home inspection reveals defects.

Like any person you hire, you want to make sure that the home inspector is qualified and licensed. The home inspector should comment on the structural integrity of the building, operability of appliances, roof, and major mechanical systems, including the plumbing, electrical, and heating and air conditioning systems.  Your inspector’s comments about the condition of a home are not usually something that is known by the prospective purchaser, sometimes the homeowner, or the realtor.

Home inspectors also make observations of the useful life of the appliances, roof, and mechanical systems.  All visible defects should be noted in the report.  There should also be comments or recommendations for repairs, including, imminent repairs.  Some inspectors also comment on aesthetic related repairs.

Some defects a home inspector checks, include, among others:

  • Cracked foundations
  • Inadequate water pressure
  • Hidden building sections with little support
  • Drainage problems
  • Termite damage
  • Fire hazards
  • Defective heating and air conditioning systems
  • Asbestos
  • Leaky roofs and leaks through walls
  • Radon
  • Environmental hazards, i.e., mold
  • Carbon monoxide and smoke detector placement
  • Hazardous electrical aluminum and lead wiring
  • Energy efficiency
  • Code violations

Home inspectors will try to limit the scope of the inspection to those defects that are visual.  Obviously, home inspectors, no matter how qualified cannot see behind the painted walls or above the ceilings, and thus, will limit their opinion to those items that can be seen.

You absolutely should be present during a home inspection.  During a home inspection, you can ask the inspector any questions. The typical time for a home inspection is about two hours.

Step 5: Meet with Your Attorney

Once that you have determined that the house is suitable for you, you will meet with your attorney to discuss the parameters of buying a home.  Among other items of discussion will be the amount of financing, the terms of the contract of sale the type home, the items included in purchase price, the time frames (for closing and contingencies).  The attorney may also discuss the closing costs associated with the purchase.  Additional, nuances discussed involve potential tax liabilities and affordability.  It is at this point that the contract of sale becomes fully executed (signed).

Step 6: Secure Mortgage Financing

The contract has been fully signed by all parties.  The lending institution receives a copy of your contract of sale.  It is at this point when you will be contacting your mortgage consultant to arrange and secure financing.  Your mortgage consultant will be requesting many documents from you, including, tax returns, pay stubs, bank statements, letters of explanation, etc.  After all the documentation has been evaluated and you are deemed worthy of receiving financing, a commitment will be issued.  A mortgage commitment being issued signifies a turning point in the transaction.

A mortgage commitment is a bank’s willingness to lend monies to you based on certain conditions. Once a mortgage commitment is issued, a contract becomes firm (meaning that the contract is no longer subject to mortgage financing – in essence, an all cash deal). Additionally, once a mortgage commitment is issued, most contracts provide that you must close title to the property even if the lender fails to fund the loan for any reason.

A mortgage commitment may contain several conditions that have to be satisfied at closing.  Your lender will assist you in the process of satisfying the conditions.

Step 7:  Prepare for the Closing of Title

At a certain point your attorney will cause a title report to be ordered.  A title report is a popular term for the preliminary certificate of title.  It is also referred to as a title binder or commitment.  A title company is may be requested to write a specific policy of title insurance in favor of a named insured, in a specific amount, subject to the requirements and exceptions shown in Schedule B of the commitment (and Schedule C, if any), and further subject to the conditions  and stipulations of the title commitment.

The title company and your attorney will clear any title exceptions which are not ordinary such that title can be delivered free and clear of all encumbrances such that a title insurance policy may be issued.

The amount of title insurance required is based upon the amount of the purchase price and the amount of the loan.  Title insurance rates are set by statute.

A survey should be ordered by you or your attorney.  A survey is defined as a horizontal projection of the premises showing the physical facts of possession with reference to the perimeter lines (see Law of Title in New York and Compendium of Real Property Title by William C. Hart). What does that mean?  Put more simply, a survey is a map of the property, as determined by the opinion of a surveyor, at a moment in time, which discloses where improvements lie in comparison to the property lines.

Step 8: Closing of Title

Your lender has approved your closing and permits a closing to be scheduled.  All the parties agree to a closing date.

Your lender will provide your attorney with its fees such that your attorney will be able to guide you in determining the amount of funds you will need to bring to the closing.

The entities attending the closing may be the following:

  • Purchaser’s Attorney
  • Real Estate Brokers
  • Seller’s Attorney
  • Lender’s Attorney
  • Title Agent
  • Purchaser
  • Seller
  • Mortgage Broker

Most of the parties listed above actually attend the closing.  If one of the parties cannot attend a closing, a power of attorney may be used.

Prior to scheduling your closing, remember to:

  • Transfer funds into an account which is readily accessible.  At the closing, generally, personal checks are unacceptable.
  • Schedule your moving company.
  • Contact your insurance and utility companies to setup your accounts.

At the closing, the deed will be tendered to you from the Seller.  The original must be recorded in the county clerk’s office prior to be given to you.  Your evidence of ownership is the deed.

REMINDER – “On or about closing date”: a closing date may take place within 30 days from the on or about closing date listed in the contract of sale.  This is set by case law based upon the notion that a reasonable time must be given to close title.

PART II

Frequently Asked Questions about Short Sales

How did this happen?

The real estate market runs in cycles. Presently, we are in an economic period in which mortgage delinquencies are on the rise.  Some of the causes of the increased foreclosure rates are higher interest rates on mortgages making payment unaffordable and the declining value of homes.  Some homeowners with adjustable interest rates are particularly stressed as their payment amounts increase, stretching their budgets to the limit.  Others see the value of their homes are less than the amount owed on the mortgage and make a business decision to not make payments.  The information herein will help you understand the short sale and how you can prepare for a short sale transaction.

What is a mortgage foreclosure?

Foreclosure is the legal proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a borrower’s interest.  A lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan.  If the borrower defaults, the lender may has the right to repossess the property through this legal proceeding.

What is a short sale?

A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage.

Why would a lender allow a short sale?

Lenders benefit because it can avoid the substantial expense and time of a foreclosure proceeding.  Most lenders do not want to own the properties used as collateral for its loans, because the maintenance costs and taxes add to their cost and decrease profitability.  Additionally, it will have instant liquidity once the sale occurs.

Do I need a realtor?

Although a realtor does not have to be involved in this transaction (remember it is the borrower that is requesting that the bank accepts less than the amount of the mortgage payoff), lenders usually want a realtor involved in the transaction.  The existence of a realtor gives the appearance that this is a bona fide transaction.  Bona fide transaction means that the transaction must be real.  Bona fide is a Latin term meaning “good faith”.   It means a good faith, genuine, fair market value offer to purchase a property and, usually occurs where the purchaser and seller do not know each other.

What is the process of a short sale?

Step1

Typically, an attorney or authorized representative of the seller may start the process by obtaining a borrower’s authorization to request information from the lender, which allows the authorized agent to act on behalf of the seller in order to discuss terms with the mortgage company.

Step2

The lender will usually require a laundry list of items that must be presented to it such that it may make a decision. The following items are generally required:

  • Signed listing agreement;
  • Sales contract and pre-approval letter or proof of funds to close;
  • Preliminary HUD 1 (net sheet) of proposed sale (this should include all fees, transfer taxes, outstanding water and sewer charges, attorneys fees, realtor’s commissions, outstanding real property taxes);
  • Hardship letter from seller explaining why payments have not been made;
  • Proof of income of seller;
  • Three months’ bank statements of seller;
  • Two years’ tax returns of seller;
  • List of all monthly expenses of seller;
  • Contractor’s proposal of needed repairs;
  • Title work on the property; and
  • Signed short sale request document provided by lender

Step3

The lending institution usually orders a BPO (a broker’s price opinion) and/or an appraisal.  Depending on whether the lender accepts the offer, the lender may then counter offer the purchase price listed in the contract of sale.  The realtor or attorney will then need to negotiate with the purchaser to see if the purchaser is willing to pay an increase purchased price.  Obviously, there is no obligation on the part of the purchaser to increase his/her offer.

Step 4

Wait for the decision. Additional documentation may be required.  This can generally take up to 30-90 days after all of the above have been provided to the mortgage company.

Why start a short sale versus allowing the bank to take the house in a foreclosure sale?

  1. The borrower does no longer have to deal with the long drawn out process and generally can walk away from the home without owing any more monies.
  2. Remember that in a foreclosure if the amount of monies secured at the auction are less that the amount owed, the lender could seek and attempt to enforce a deficiency judgment against the borrower. If a borrower defaults he/she runs risk of loss of his property by foreclosure and possibility of deficiency judgment if the value of land at time of sale is less than amount of obligation.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect the shortfall.  As a condition of the short sale the lender may require borrowers to sign a note to repay the shortfall. It may also file a collection or a judgment for the amount of the shortage.  Usually, debt forgiveness is granted.

Are there any tax consequences?

The answer may be yes depending on whether the home is an investment property or a principal residence and the amount of the shortfall.  The IRS recognizes capital gains on the forgiveness of debt.

What if there are multiple lenders?

Short sale approval is required from each lender.  The first lien holder usually offers the subsequent lien holders as little money as possible in order to achieve the sale.  Typically, subordinate mortgage holders do not have much leverage to negotiate with the borrower and accept much less monies from the first lien holder in the short sale process (sometimes as little as $500.00).  Do not forget that subordinate lienholders’ interests may be wiped out in a foreclosure sale and they may receive nothing.   Some subordinate lien holders will refuse to negotiate.

What should I look out for as a purchaser in a short sale transaction?

One of the biggest hesitations that a purchaser has is entering into an agreement that is contingent on the approval from the seller’s lending institution.  The expenses of a home inspection, lender application fees and appraisals, and attorney’s fees generally turn people away from the process.  Additionally, time is a major factor as the decision to purchase a short sale home is usually a time consuming process.  It is very difficult to coordinate a purchase of a home with a purchaser who has already contracted to sell his/her home.

What should I look out for if I were the seller in a short sale transaction?

  1. Gather all your information at once, include the following:
    1. Documentation listed above;
    2. Let your representative know the following:
      1. how many mortgages exist against the house;
      2. are there any additional judgments or liens.
  2. Assess the value of the home.  Lenders will not just accept any offer that is presented.  The value being offered should be reasonable.
  3. The lender will not allow the seller to make any money from the sale of the home.
  4. Seek advice from an accountant to see if there are any tax consequences.
  5. Seek the advice of an attorney.  Some lenders require that the seller sign a deficiency note.  See what assets the borrower’s possess.  If the borrower owns multiple properties, just because one is a bad investment, does not mean that they can simply get rid of the property in a short sale.  Remember the lender will ask for a financial breakdown of assets and may seek the recovery of the deficiency from the other assets.

PART III

Refinancing and the Mortgage Tax

Mortgage tax is imposed for the privilege of borrowing monies in the State of New York.  Additional, mortgage taxes may vary from county to county and even within each county.  The amount of mortgage tax paid also varies based upon the tax class.  I have assumed for the purposes of this discussion that most people will be purchasing a one or two family dwelling or a condominium.

Westchester is one of the few counties in New York that have varying mortgage taxes within the State.  In Westchester, mortgage tax can be computed by calculating 1.05% of the mortgage amount less $30.00 for one or two family dwellings when indicated in the mortgage. For Yonkers properties, mortgage tax can be computed by calculating 1.55% of the mortgage amount less $30.00 for one or two family dwellings when indicated in the mortgage.

Mortgage tax is NOT imposed on cooperative units.

Saving Mortgage Tax

In order to avoid having to pay mortgage tax twice, an exemption exists in accordance with Section 255 of New York Tax Law, which allows borrowers to pay mortgage tax on the difference between the new loan amount and the principal amount of the old loan.  This exemption applies to the difference of monies borrowed over and above the existing principal balance of the mortgage being assigned and the increased loan amount.  This difference is called the “new money” and is the taxable mortgage tax in the transaction.

This difference is called the “new money” and is securitized by a mortgage called the “gap mortgage”.

An agreement is also executed between the lender and borrower called a “Consolidation, Extension and Modification Agreement”, which consolidates the old loan with the new loan, extends the term of the loan and modifies the terms of the old loan.

How it works:

The underlying bank assigns the mortgage (or some cases multiple mortgages and agreements) to the new lender.  Provided that all the documents are satisfactory to the new lender, a consolidation, extension and modification agreement will permit the new lender to consolidate the old loan with the new loan to form a new single lien.  Of course, the old terms change to the new lender’s terms.

Procedure:

  1. Determine whether the monetary savings outweighs the costs of recording, attorney’s fees, and time waiting for the request for an assignment.
  2. A request is made to the underlying bank to assign the mortgage to the new lender.  Of course, the underlying lender must be willing to assign its loan to the new lender.
  3. All collateral documents (mortgage, note, and assignment) must be forwarded to new lender’s attorney at or prior to the closing for review.  In some situations, documents cannot be retrieved by the underlying bank or recreated, i.e. a lost note or missing endorsement.  In this instance, the new lender will not accept the assignment.

Some of the reasons why an Assignment of Mortgage is not pursued:

  • Time constraints: In some cases, lenders may take up to 4-8 weeks to process the assignment of mortgage.   A lead time for coordinating the assignment is required.Lender approvals from the seller’s lender and the purchaser’s new lender must be obtained.  Some lenders do not assign its mortgages.
  • Knowledge:  Clients may not be educated about this loop hole and simply do not know because they never heard of it.
  • Costs:   Is it worth it?  There are fees associated with obtaining the assignment from prior lender.  For example, some lenders require an up front fee, the lender’s attorney requires a fee, additional recording fees, and increased bank attorney fees.
  • Lender Participation:  In addition to the existing lender permitting the assignment, your lender must also participate in permitting the assignment of mortgage.

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