Category Archives: Real Estate-Purchases

New HUD-1 form released

Mortgages, Real Estate-Purchases

Anyone that participates in real estate closings is dreading the new HUD-1 form that is required beginning 1/1/10.

The new HUD-1 form (this is the closing statement that shows all of the sellers and buyers costs and their “bottom lines”) includes a third page that references the good faith estimate given to the buyer by the lender.  It directly compares the figures from the good faith estimate with the final, actual figure.

It’s a step in the right direction, but it strikes me as complete overkill.  Predatory, overcharging lenders were a problem 4 years ago, not now.

hud

Wait for new form to file for real estate tax credit

Real Estate Tax Credit

It’s great that the$6500 move up buyer tax credit was added and that the $8000 first-time buyer credit was extended.  But, IRS is advising buyers to wait until the end of December to file for the tax credit until it issues a new form 5405 that reflects the new changes.

Real estate writer Ken Harney (a consistently excellent writer) says that if you file for the credit using the “old” form 5405 (which is still on the IRS website), it is likely that the tax rebate will linger or not be processed at all.

So anyone who bought after November 6 of this year should wait until later this month for the new form 5405 before amending their 2008 taxes.

Drama queen: The mortgage contingency clause

Mortgages

All real estate contracts, except for cash deals, have a mortgage contingency. The mortgage contingency is the drama queen of the real estate contract. It brings out the worst in both seller and buyer and it confuses and frustrates everyone.

A mortgage contingency is a condition in the contract on the buyer  being approved for financing by a certain time at a certain interest rate. The contract usually says: “This contract is contingent on the Buyer getting an 80% mortgage for 6 per cent by December 31.” If the buyer is not approved, by December 31, the buyer’s attorney sends a request to extend the mortgage contingency. If the buyer does not obtain financing or if the seller does not grant the extension, the buyer can declare the contract to be dead and all earnest money will be refunded to the Buyer.

Most real estate deals have about 3 mortgage extension requests. Some out-of-control contracts have up to 20 extension requests. I call these deals, “draggers.”  A dragger is not fun for anyone. The worst situation in the world for seller and buyer is to have a real estate deal evolve into a dragger with 10 mortgage contingency extensions, only to have the buyer denied for financing at the last minute. Not fun.

Mortgage Contingency from Buyer’s perspective: All buyers think that they are approved for financing about 5 seconds after they sign the real estate contract, but the truth is that it takes about 30 days for a full, unconditional approval. Mortgage brokers often tell clients “You’re approved,” when they pre-qualify the buyer and this starts the confusion. Of course, what the mortgage broker means is that Mr. Buyer appears to have the credit score and income that he might qualify for financing.

A full mortgage approval requires: An appraisal of the property, verification of all of the buyer’s accounts, a credit check, submission of the loan to underwriting and the clearing of all conditions. When a loan comes out of underwriting, there are always many conditions on the loan approval. Typically, mortgage contingency extensions are requested until all of the conditions are cleared. The holy grail of mortgage approval is the “clear to close.”  Extensions are no longer needed once the loan is clear to close, which means that all conditions have been cleared.

Buyers don’t like mortgage contingency extensions because a mortgage contingency extension request implies that:  a. The closing will be delayed. b. The extension request casts an aura that the buyer is some kind of slacker who can’t get a mortgage.

However, the buyer really won’t like it when he or she is denied financing and then can’t get their earnest money back because the mortgage contingency expired.

From Seller’s perspective: The seller signs a contract and then gets roughed up by the buyer on the inspection. Mr. Seller bites the bullet and gives a $2k credit on the inspection, but then has to put up with 4 mortgage contingency extension requests from the buyer. With each extension request, the seller gets more frustrated because he feels he is stuck with an inferior buyer that will not qualify for financing.

Sellers often believe that the buyer’s earnest money is the sellers  (to keep) if the closing does not happen on time. Not really. The buyer’s earnest money will be returned, not given to the seller, if the contract is terminated while the mortgage contingency is still in force.

The best way to handle a mortgage contingency is to give at least 30 days to obtain financing. Too many contracts allow for only 10 to 14 days for the buyer to get financing and that means that there will be several mortgage extension requests. Other than allowing 30 days initially for the buyer’s financing, the parties just have to sit tight and realize that most closings will occur, some will close late, and there will always be two or three mortgage contingency extensions making both parties upset.

Condo mortgages tougher than ever

Mortgages

condo

It’s harder than ever to get a mortgage to buy a condo.

Last week,  a client had trouble obtaining a mortgage because the condo association reserves were less than 10% of the operating budget.  The condo association had just paid for a large repair to the roof and it tapped the reserves. The association was not aware that by doing so they came close to killing the contract for the buyer (the hard-working mortgage broker was able to get an exception to this and it closed).

Earlier this year, Fannie Mae made added the following requirements to condo mortgages:

  1. No more than 15% of the condo owners can be delinquent in paying dues.
  2. No more than 10% of units can be owned by a single entity.
  3. If you put down less than 25%, the interest rate on the loan will be increased  by 3/4%.
  4. Buyers have to get a “contents” insurance policy (used to be optional).
  5. 10% of the budget must be in the reserve fund.

On top of that,  condo appraisals  are regularly coming in short of the purchase price.  Appraisers are using comparable sales from the last three months, rather than from the last year.  Any comparable sale more than three months old is discounted heavily and that drags down the appraised value.

Buyers should be aware of the Fannie Mae rules and should ask for the condo budget before they make an offer.

Home buyer tax credit extended: The new rules

Real Estate Tax Credit, Real Estate-Purchases



The House and Senate have passed an extension of the $8000 first-time buyer tax credit and added a $6500 tax credit for move-up buyers. The Senate is expected to also sign it shortly and President Obama will sign it today signed it on November 6.

This was absolutely necessary because the housing market was slowing down already, due to the planned November 30 expiration of the credit. Here are some answers to questions on the new version of the tax credit. More here.

The text of the HB 3548 can be found by clicking in the box above. (It’s pretty tortured language…).

The $6500 tax credit for move-up buyers starts for closings after 11/6/09. Oddly enough,  blogs and websites differed on when the move-up buyer credit started. Some said it started on 11/6/09 and some claimed it started 12/1/09. This has already been in issue in several closings I am handling. It is not clear that the move-up buyer credit started 11/6/09.

Both first-time buyers and move-up buyers can claim the credit by amending their 08 return or they can claim it on their 09 tax return.

111309tabletaxcredit

The Quirks of Buying a Fannie Mae Foreclosure

foreclosures-shortsales, Real Estate-Purchases

fannie(4/14/11- This post was recently updated here.)

Fannie Mae is perhaps the most difficult seller of foreclosed homes. Fannie Mae and Freddie Mac own more than half of the country’s mortgages. Delinquencies of Fannie Mae homes are rising, so we will likely see more and more of these. Unfortunately, Fannie Mae pops up a lot as a seller of REO (real estate owned) foreclosed properties and I always cringe when I get one of these contracts.

Why is the purchase of a Fannie Mae foreclosure different from any other foreclosure buy? Let me count the ways:

1. The Infamous Addendum

All REO sellers make the buyer sign an Addendum. The Fannie Mae Addendum is tricky and close to incomprehensible. When a buyer makes an offer, the buyer signs a standard real estate contract and sends it to the listing agent. Fannie Mae doesn’t sign this contract. It verbally accepts the contract. (Never mind that real estate contracts have to be in writing an can’t be verbal–they’re Fannie Mae, and if they feel like undoing centuries of contract law…you better get used to it)

Once the contract is verbally accepted, then the listing agent sends the poor, unsuspecting selling agent the Addendum.  The buyer then signs and returns the Addendum. Usually, it takes about three weeks from the time the Addendum is signed by the Buyer to get a signed contract and Addendum back signed from Fannie Mae. It takes FOREVER to get these back. I have a file now that is ready to close according to the closing date in the Addendum, but we don’t even have the signed contract and Addendum back yet from Fannie Mae.

2. Confusion on the Verbal Acceptance Date and the inspection

The main problem with the Addendum is that the home inspection contingency period begins on the verbal acceptance date and runs for 7 days from that date, not on the date that the contract is accepted in writing by Fannie Mae. Many buyers don’t realize this and think that the inspection contingency starts when the signed contract is received back from Fannie Mae.

So the inspection period may pass by and expire, without the Buyer knowing this, and the Buyer cannot cancel the contract if the inspection turns out poorly. So if you buy a Fannie Mae home, schedule your inspection immediately after the verbal acceptance date or your home inspection contingency may expire and you will be stuck with the house or lose your earnest money. Here is an Arizona case in which the Buyer couldn’t get the earnest money refunded after the inspection turned out poorly, largely due to confusion over the verbal acceptance date.

3. Dewinterizing is on the Buyer

Fannie Mae properties are always winterized. The gas, water and electricity are turned off. Fannie Mae does not turn the utilities on. Most REO sellers will dewinterize for a buyer to inspect the property, but not Fannie Mae. On a Palatine property last year, the buyer dewinterized the townhouse and leaks sprang from everywhere. It took the plumber most of the day to patch the leaks and it cost more than $600.00, which the buyer had to pay.

If you can get the place dewinterized yourself and you are lucky enough to do an inspection before the contingency expires (due to the verbal acceptance date), please do not even consider asking for any credits or repairs after the inspection because the answer will be no. It is strictly an in/out situation and credits or repairs are extremely unlikely.

4. Buyer pays for Title and Transfer Tax

The Addendum also says that the buyer has to pay for the state and county transfer tax and for the seller’s share of title insurance. This is at least $2000.00 in most cases, that the buyer would not otherwise have to pay. Most buyers do not see this term buried in the Addendum. You can ask for a closing cost credit in Par. 36 of the Addendum to cover the cost of the title and transfer tax. The seller’s attorney will furnish the title even though you have to pay for it. You can’t buy your own title insurance.

5. Penalties for late closing

Whatever closing date you put in the Addendum, you had better be able to close that day, or you will be penalized $100 to $150 per day for each day you are late. Some buyers think that because it took three weeks to get the signed contract back, that the closing date will be extended easily, and that the Addendum closing date is not set in stone. Wrong. Fannie Mae is very strict on closing dates and the Buyer will have to pay for any extensions. Also, the buyer will have to sign all extension requests on a Fannie Mae-provided form. The attorney cannot request extensions unless they are on the Fannie Mae form signed by the buyer.

6. Sorry no keys

Fannie Mae does not provide a key at closing. If you are able to run the gauntlet of buying a Fannie Mae foreclosure, then the listing agent will not furnish a key and will take back all keys from the selling agent at closing. Supposedly, all FM homes are keyed the same (which I find hard to believe) and there is too much “liability” for Fannie Mae to furnish a key. Thankfully, most of the listing agents pay little to no attention to the property, so doors are often left open and I have not had a buyer have to call a locksmith yet to get entry to the house after closing.

Short sale vs. foreclosure

foreclosures-shortsales, Real Estate-Purchases

I was reading this great Wall street Journal  article on “Are distressed homes worth it?” The common wisdom is that it is easier to buy a foreclosed home than a short sale home. This is true in that it is more likely that a foreclosed home will actually close and it is more likely that a short sale will not close.  One telling statistic in the article says that no more than 20% of short sales are successful. I used to say 40% of short sales actually closed, but I now think 20% is right.

However, buys of foreclosed properties are getting more painful for the buyer. A partial list of what makes them hard(er):

1. Seller takes forever to respond to original offer.

2. It takes about two weeks after agreement to get a signed contract.

3. The seller’s attorney does not respond to any requests under the attorney approval or home inspection. They have a million files and will never call back.

4. The utilities are turned off. If you are not smart enough to extend the home inspection until the utilities are turned on by the seller (and all leaks–there will be many– are fixed) then you will be stuck repairing 20 leaks that spring in the walls when you turn on the water.

5. When you do an inspection, it’s unlikely you will get any credit for repairs. The sale is “as is” and the seller means it.

6. Sellers constantly give artificial deadlines. “If this doesn’t close tomorrow we are putting the house back on the market and keeping the earnest money.”

7. The seller may try to stick you with title insurance, transfer tax etc, or if you are buying a condo, they can force you to pay 6 months of the foreclosed owner’s condo dues.

8. No sellers representative will come to closing.

9. Once you are lucky enough to get to closing, it may take up to two days after closing to get a “seller signed HUD.” After the seller has imposed all kinds of phony and irrational deadlines, they will take forever to sign the final closing statement. You cannot move in until they do, so don’t have that moving van parked in the drive.

That being said, many buyers find that the appraisal of the foreclosed home is thousands more than they paid for the property, so they put up with this basically unpleasant exercise.

Spot approval goes away next month for FHA condos

Real Estate-Purchases

In order to obtain FHA financing, a condo building must be FHA approved. This meant that the building had to “right of first refusal” and met FHA lending guidelines. Many buildings are not FHA approved, and in those cases, the lender could seek “spot approval.” Spot approval was not fun and often did not go well.

Effective October 1, 2009, spot approval is gone. Instead, an FHA direct endorsement lender can obtain approval for an entire building, even with a right of first refusal. Here is a great summary of the new process.

Since FHA mortgages are really the only game in town, this will help open up FHA financing to many smaller condo buildings that were left off the FHA approved list because of a right of first refusal in the declaration or because approval was just too hard.

Say goodbye to 30-day closings due to new regs

Real Estate-Purchases

As if the closing process was not difficult enough already, a new set of Truth in Lending  (TIL) and appraisal regulations went into effect on July 30 and the end result will be slower closings. In the past, a lender could rush a mortgage application and close in as little as two weeks. Now, I predict that it will be difficult, if not impossible, to close in less than 30 days.

The new regulations slow things down by requiring the following:

1. Prohibits lenders from accepting payment for the loan application until a new good faith estimate of fees, now called an “early disclosure,”  is given to the buyer.

2. There is now a 7 day waiting period after the early disclosure is given that must expire before closing can occur.

3. A final TIL is then mailed 3 days before closing. If this baby increases by more then .125% from the early disclosure, then the lender has to start over and give you a new 7 day waiting period to think it over. That will be fun when the buyer has his moving van packed!

4. The appraisal must also be sent to the client 3 days before closing.

Lenders are terrified of the TIL laws in general and, believe me, they will follow these regulations to a T. Lenders are afraid of TIL lawsuits because if they lose the case, they pay heavy duty damages, attorney’s fees and costs.

I am already getting calls from lenders on the day that they take an application asking for the buyer’s title charges. This is easy to estimate, but it will further slow down the process while lenders wait for seller’s attorney to call them back with the fees. I put together a simple google spreadsheet that estimates buyer’s title fees.

Ken Harney has a good summary of the new regulations. And here is an interesting, if slightly technical, presentation from Wells Fargo on how it all works.