*A Primer On The Real Property Purchase Process*
NOTE: THIS ARTICLE PROVIDES GENERAL INFORMATION ONLY. IT IS NOT LEGAL ADVICE AND SHOULD NOT BE RELIED ON TO PROVIDE LEGAL ADVICE OR ANY LEGAL OPINION. CONSULT A LAWYER IN YOUR AREA FOR ADVICE AS TO SPECIFIC LEGAL QUESTIONS REGARDING REAL PROPERTY
This article is designed to describe in practical terms the process of buying a piece of land. IT IS NOT INTENDED TO BE LEGAL ADVICE.
When you find that perfect piece of land in the country and take steps to purchase it, you will enter into a confusing process which has its own distinct language and procedure. The process of buying and selling real property is not designed to generate work for attorneys and real estate agents, but is the result of 1,000 years of Anglo-Saxon jurisprudence designed to give notice as to who owns a piece of land and to make for an orderly transfer of ownership.
The central idea of our system of land ownership is that land is always owned by someone. In England, the king owned land. In the U.S., land may have first been owned by the state and given to someone as a homestead (i.e.: Oklahoma "Land Rush") or as payment for service, such as serving in the Continental Army in the Revolutionary war.
The term I heard over and over when we purchased our first house was "closing". It seemed so profound and official, almost intimidating. Other states may refer to it by different names, but the closing is where the transfer of ownership from the seller to the buyer takes place in accordance with the written terms of the contract between them. The closing is where your name, as the buyer, gets added to the list of owners. This list of owners, known as the "chain of tile" is theoretically traceable back to the original owner.
To make certain that the terms of the contract are fulfilled, almost all real property transactions involve the use a of a neutral party who holds the funds and documents until all matters of the transaction have been resolved. At the actual time that the seller and buyer come together to sign the documents the seller will be asked to prove that he actually owns the property (known as "clear title") and the buyer will be asked to provide the money needed for the purchase. The action of the agent holding the documents and money is known as "Escrow". The agent is simply known as the "Escrow Agent". The role of this agent becomes more important when the buyer has a loan for the purchase of the property. The Escrow agent typically provides many other services necessary for the closing process.
There are three documents that are necessary to purchase real property. They are:
1. The Contract between the buyer and seller,
2. The Abstract of Title.
3. HUD-1 Final Closing Statement.
The Purchase Agreement describes the Who, What, Where, When and How of the transaction. It will list the Buyers and Sellers, the Real Estate Agents involved and the amount of commission due each agent. It will state the name of the lender and it may list the name of the title or escrow company who will handle the closing.
The Purchase Agreement will also state the legal description of the property. Please note that the legal description of the property will usually be different than the physical address or mailing address. The date of acceptance of your purchase offer, the date when the sellerís proof of ownership must be delivered, the date a loan approval must be made and the date of the closing.
The terms of the transaction will also be explained. 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.
The lender is and the loan number may also be listed.
Who will hold the downpayment is listed. This may be 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.
The responsibility for ordering such services as a survey, termite report, and roof or structural inspections will also be listed.
Lastly, What will happen if certain things donít occur will be described, such as 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.
MORTGAGES AND DEEDS OF TRUST
Documents describing the terms of the loan between the buyer of the property and the party who loaned the money for the purchase of the property are also part of the contract. The buyer/borrower will be asked to sign a Promissory Note. A promissory note is simply a promise to pay the lender a specific amount of money every month. In order for the lender to protect his interests, he will require that the borrower sign a mortgage or similar document in order to protect the lenderís interests. Depending where you live, this may be a mortgage or a deed of trust, but the ultimate purpose of either is to protect the lenderís money that was loaned to the borrower.
The law in your state will determine which type of security instrument must be used. In title theory states, a mortgage is used and it conveys ownership to the lender. A clause in the mortgage provides that title reverts back to the borrower when the loan is paid. In lien theory states, the mortgage creates a lien only on the property and the title remains with the borrower. The lien is removed when all the payments have been made.
Some states are considered modified lien theory states and in these states the title remains with the borrower, but the lender may take title to the property if the borrower defaults.
The basic difference between the mortgage as a security instrument and a Deed of Trust is that in a Deed of Trust there are three parties involved, the borrower, the lender, and a trustee, whereas in a mortgage document there are only two parties involved, the borrower and the lender. In a Deed of Trust, the borrower conveys title to a trustee who will hold title to the property for the benefit of the lender. The title remains in trust until the loan is paid.
Frequently, a title search company, escrow (closing) company or bank is listed as the trustee on the Deed of Trust. When the loan has been paid, the trustee will issue a release deed or trustee's reconveyance deed. This deed of reconveyance should be recorded at the county recorder's office, to make public notice that the loan has been paid and that the lender's interest in the property has ended.
It is important to know that the biggest difference between a mortgage and a deed of trust is the manner in which foreclosure proceedings take place. The laws in your state will determine the method of foreclosure that must be used. Generally, the rules when using a Deed of Trust allow for a faster foreclosure time than with a judicial foreclosure required with a mortgage. Under a Deed of Trust, when the borrower defaults on the loan, the lender delivers the Deed of Trust to the trustee, who then is instructed to sell the property.
After proper notices have been posted and rules are followed, the property is sold at a trustee's sale and the loan is paid. Lease note t he difference between a deed, which transfers title to the property and is evidence of ownership with a Deed of Trust, which is a means of securing a note and providing for foreclosure proceedings.
THE ABSTRACT OF TITLE
Once you have decided to purchase the property, it is imperative that it be verified that the seller actually owns the property he is attempting to sell you. The issue may be more complicated. The owner may still be in the name of a deceased parent or grandparent or the owner may have been sued and have judgments against him, a barrier to transferring property in most states. Title, meaning the ownership interest in the property is usually described as a bundle of sticks. If you own the entire property, the water and minerals under it, you have the entire bundle of sticks. If you allow an adjoining landowner access to his property by driving across your land, you have given away one of the sticks in your bundle. If you sell the rights to the minerals under your land, such as oil, you have given away another stick from the bundle.
A title search is the process of determining from the public record just what sticks you have and what sticks others may have.
A title search is a means of determining that the person who is selling the property really has the right to sell it, and that the buyer is getting all the rights to the property (title) that he or she is paying for.
A specialized search company, known as a title company can undertake the search process. In other states, searches are made only by practicing attorneys.
Generally, a title search today is made in conjunction with the purchase of a special insurance policy that protects the buyer on the chance that the seller does not have good title to the property. This insurance, known as "title insurance" should be mandatory for the purchase of any property, but especially rural property or property purchased from the estates deceased individuals. When purchased, The title insurance company will, at its own expense, defend the title and will pay losses within the coverage of the policy if they occur.
Title searches generally involve a search of the following records:
Chain of Title
This is simply a history of the ownership of a particular piece of property, telling who bought it and sold it, and when. The information may be derived from public records, usually a County Clerk's or Recorder's Office, or it may be obtained from records (title plants) privately owned and maintained by title companies.
This is a search to determine the present status of general real estate taxes against the property. The tax search will reveal if taxes are current or whether any taxes are past due and unpaid from previous years. Title insurance generally protects the buyer against loss from unpaid and past due taxes and assessments.
Often, a title researcher will visit the to verify the lot size, check the location of improvements, look for evidence of easements that are not shown of record and check on who is living there.
The purpose of this is to supplement the information learned from the title search. The law assumes that a buyer of real property has notice of all matters properly shown in the public records as to that property as well as any information that an actual inspection may reveal.
If the inspector detects an unrecorded easement or other evidence of outstanding rights that could affect the owner's title and possibly the value and intended use, the company tells the buyer of these things before he or she closes the purchase. Those matters must then either be disposed of or may be shown as exceptions in the title insurance policy.
Judgment and Name Search
One of the most important parts of the title search is to determine if there are any unsatisfied judgments against the seller or previous owners which were in existence while they owned the title. A judgment is a general lien against the debtor's real estate and constitutes security for any money owed under the judgment. The real estate can be sold to satisfy the judgment. It is important to be sure that a title is not subject to judgments against the seller or previous owners as rights established by judgment decrees, unpaid federal income taxes, may be prior claims on the property, ahead of the buyer's or lender's rights. If a judgment is discovered that constitutes a defect in the title, it is pointed out, and the seller must then eliminate it before the title of the new buyer can be insured free and clear of that judgment.
When these searches have been completed, the title company issues a commitment to insure, stating the conditions under which it will insure the title. The buyer and seller and the mortgage lender can proceed with the closing of the transaction after clearing up any defects in the title which may have been uncovered by the search and examination.
The mortgage lender is as concerned as the buyer about the quality of the title because the property is to be security for the new mortgage loan. The mortgage lender requires assurance that it has a valid first (or another acceptable priority) mortgage lien on the property. This is not only common sense, but generally is a legal requirement of regulated mortgage lenders.
The lender's title insurance, however, doesn't protect the new buyer of the property. Although the land is the same, the interest of the buyer and the interest of the lender are very different. The provisions of a lender's title insurance policy are very different from those of a buyer's policy, so the buyer should obtain his own policy, often issued simultaneously with the lender's policy.
THE HUD -1 STATEMENT
RESPA, or the Real Estate Settlement Procedures Act, requires a lender to give a borrower certain disclosures during the course of their loan. Some disclosures will list the costs associated with the closing, other disclosures will outline the lender's closings costs and escrow account practices. Another disclosure will describe the business relationship between the settlement service providers. These disclosures are called "RESPA Disclosures" because they are mandated by the Real Estate Settlement Procedures Act.
The first RESPA form a Borrower is likely to see is the Good Faith Estimate of Settlement Costs. The lender will be required to give you a good Faith Estimate of the settlement charges you will likely have to pay at closing. The lender will give you a copy of this disclosure either when you apply for your loan or within the next three business days after application. You should be aware that the costs listed in the Good Faith Estimate are only an estimate and the actual costs at closing may vary from these estimates. The Good Faith Estimate is not a guarantee, but you can compare the estimated closing costs with the actual closing costs and ask the lender or closing agent any questions at the closing.
Your lender will also be required to give you a copy of a Servicing Disclosure Statement, which will tell you if your lender anticipates that someone else will be servicing your loan. What this means is that your lender may not be the agency collecting your monthly mortgage payments. You must be told when you apply for your loan or within three business days, if your lender expects this to happen.
The Good Faith Estimate form will be provided to you if you are applying for a federally related mortgage loan. Its 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, and 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. life of the loan in others. You will want to weigh your options when agreeing to pay this fee.
An appraisal fee and a credit report fee are typically not negotiable, as the lender will order these.
The mortgage broker fee listed on the Good Faith Estimate form is a negotiable item, a cost that 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.
There are some fees listed on the Good Faith Estimate form that are required to be paid in advance and 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, government recording and transfer charges would 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.
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. Title insurance fees will then be listed. Ask 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.
The next listing of fees will include a document preparation fee, notary fees, attorney fees, and other miscellaneous fees.
One business day before your actual closing, you are allowed to review a copy of your HUD-1 Settlement Statement. This is the actual, final statement of the settlement fees you will incur at closing. The HUD-1 statement will list these various fees, depending on your individual transaction: the sales commission, the loan origination fee, the loan discount points, the appraisal fee, the credit report fee, the assumption fee, any prepaid interest, the mortgage insurance premium, the first year's homeowner's insurance premium, the mortgage insurance escrow account, if any, the recording fee, the transfer tax, the property survey fee, the term it report fee, any homeowner's association fees, and any other fees specific to your particular purchase. If you do not have a loan, the closing agent will give you a settlement or closing statement to review prior to closing
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.
TAX DOCUMENTS AT CLOSING
The Tax Reform Act of 1986 required anyone responsible for closing a real estate transaction to report a real estate sale or exchange to the IRS on Form 1099-S. In addition, they were required to furnish a statement to the seller of the gross proceeds of the sale. In 1998, with the passage of the Tax Payer Relief Act of 1997, an exception to this reporting requirement was allowed.
If the sale price of your residence is $250,000 or less ($500,000 or less for married sellers) and you have lived in the property, as your principal residence, for the last two out of the last five years, your closing agent will not be required to file Form 1099-S with the IRS. The gross proceeds of the sale need not be reported to the IRS if these conditions are met. Be sure that your closing agent has your written confirmation that your sale is exempt from the IRS reporting rule.
Among the various items which will be prorated, or shared between the buyer and seller at the closing will be real estate property taxes. Often the closing agent must use the taxes from the previous year to compute the prorations for the sale.
Once escrow is closed, it would be difficult to go back to the seller and ask him to pay you for any additional property taxes. Likewise, you would not want the seller to come back to you and ask for a refund if the property taxes were to go down.
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 the closing. Once the transaction has taken place, 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 at closing time. The escrow agent acts as the stakeholder of the money, and this money is then is released only after the repairs have been made.
What happens when you, as the buyer, make a final inspection or items in the inspection report have not been corrected? The first answer that would come to mind would be to delay the closing until the seller has repaired or cleaned up the property. This may often not be possible for several reasons. The buyer may be obtaining a new mortgage on the property and the interest rate on the buyer's loan may have been "locked in" by the lender. This rate may expire on the day of closing. If not closed on time, the buyers would have to go back to the lender to renegotiate a new interest rate and charged additional fees for new loan documents. The seller may have purchased a new property, and he may need the sales proceeds from his previous house to buy his new home, so a delay on the sale would delay his new home sale. The best solution is to try and come up with a compromise at the closing table.
Some closings may go quite quickly, but when there is a dispute, the closing can go on for hours. The longer the buyer and seller dispute the items which need to be corrected, the more tempers seem to wear thin, all the parties get tired, and a solution is hard to find.
Generally, your closing costs will come out to between 4 and 5 percent of your purchase price. The closings costs will include title searches, government taxes, notary fees, loan fees, escrow fees, recording fees, reconveyance fees, prorations and sales commissions
When you begin shopping for the best home price, mortgage rate, you should also search for the best closing fees. Escrow fees are not generally regulated by law or by state statue.
Keep in mind that some miscellaneous fees may be negotiable, such as the notary fee, document preparation fee or some attorney fees. You may find that closing fees can vary as much as $100 or more from company to company. Be wary of an escrow company charging significantly less than other companies in your search. You may not be getting the same services which may be included in the other companies' fees.
When an attorney is involved in the transaction, whether representing the Buyer or the Seller, normally the attorney will explain each provision in detail. Keep in mind that the escrow officer or closing agent is a neutral third party only. The title company cannot give legal advice or interpret documents for you. The closing officer can explain each item and review how the numbers were calculated, but for any legal opinions, you will want to consult with your attorney.
This is the first of several articles regarding real property. I hope that you have found it to be interesting and helpful.
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