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'Conditions' Can Be Deal Killers

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | November 16th, 2012

The typical real estate sales contract includes not just a price and a closing date but also a number of clauses, any of which can trip up the buyer or seller and scuttle the deal.

While contract language may vary from one place to another -- not just state to state but also county to county, and sometimes even from one company to another -- here's a quick rundown of some clauses or "conditions" that are likely to cause the most trouble:

-- Financing. Perhaps the most common contract condition makes the transaction contingent on the buyer obtaining either a mortgage or a written commitment in the amount required to complete the purchase within a certain time frame.

Each part of this clause is important, obviously. But according to real estate professionals, the timing aspect can be the most troublesome. The sooner the buyer can complete this condition, the better. If the deadline passes without a loan approval, the seller has the right to cancel the contract.

"Since financing contingencies can be complex and vary widely, they require strict attention to all timelines involved," advises Sam DeBord of Coldwell Banker Danforth in Seattle.

But buyers beware of using this clause to get out of the deal. You could find yourself in default if you fail to follow through on what you agreed to.

In Virginia, making a substantive change -- seeking a loan that far exceeds the amount specified in the contract, for example, or being unable to find a rate that's lower than what's stated in the contract -- may put your earnest money deposit in danger. In Minnesota, if your financing falls through after you have satisfied the financing contingency, the seller can keep all the earnest money as damages.

On the other hand, Florida contracts are "very one-sided" in favor of buyers, reports Liane Jamason of Smith & Associates in Tampa. Twice in recent weeks, Jamason had to deal with upset sellers who mistakenly thought they were entitled to their buyers' deposits when their financing fell apart after months of waiting to close.

-- Closing costs. A poorly worded clause here can cost the buyer or seller a lot of money, depending on how it's written.

Often, the agent writes in the contract that the seller will pay X amount toward the buyer's closing costs at settlement, when what the buyer really wants is that X amount be paid toward closing costs, points, prepaid items, lender allowed costs, warranties, administrative costs and fees.

"Closing costs are really only those associated with closing the transaction and may be far less than the entire list of financing charges," explains Jim Mellen of RE/MAX Peninsula in Williamsburg, Va. "A buyer who shows up at the table planning to have $6,000 paid on his behalf will be awfully angry if he gets only $1,200 of his fees paid."

Another possible issue is how the closing cost contribution is stipulated. If it is given as a portion of the selling price, say $300,000, a 3 percent contribution could cost the seller $9,000. But if it is written as a part of the financed amount, say $240,000, the seller would be on the hook for just $7,200.

Make a mistake, and there are no do-overs. "The written word on a contract will trump intentions all day long," Mellen says.

-- Disclosures. The different property disclosure clauses are "some of the more difficult to navigate," says Ralph Harbison of RE/MAX Realty Brokers in Birmingham, Ala. Buyers tend to want "yes" or "no" disclosures, but sellers prefer something that says they are not aware of any issues. And that leaves buyers to wonder what's wrong with the place.

Writing certain inspection clauses -- termite, radon, mold, lead-based paint, home -- into the contract should go a long way toward removing the buyer's anxiety, but only if the buyer adheres to the contract's timelines.

In Florida, for example, the buyer typically has 10 days in which to obtain and review a home inspection. The buyer can cancel the contract during this period by providing a written notice to the seller, or he can ask for an extension. But issues arise when the buyer tries to negotiate repair credits or actual repairs and the inspection period expires.

"If the repair issues cannot be resolved during the initial inspection period, the buyer must execute the cancellation or extension," says Blair Damson of Coldwell Banker in Coral Springs, Fla.

In the Philadelphia area, as long as the buyer adheres to the time limit, he only has to notify the seller that he does not wish to proceed to get back his earnest money deposit. But Linda Williams, an attorney/agent with Sage Realty in Wayne, Pa., goes a step further by making sure the deposit is not payable to the seller until after the inspection period ends.

In Warren County, N.Y., broker Mark Bergman, president-elect of the local multiple listing service, writes inspection clauses with specific repair cost limitation "to prevent frivolous renegotiation."

-- Dates. One more thing about timelines: Be explicit. Contract language should be clearly spelled out in either calendar days or banking days, says Magda Robles of Keller Williams Properties in Weston, Fla. "Number of days is not good enough," she says. "Specify the specific month, day and year.

-- "As is." This clause can be a double-edged sword, says David Welch, a broker in Orlando, Fla. While the seller is not obligated to make any repairs found necessary during an independent home inspection under the as-is clause, the buyer can cancel for any reason if he does not like what the exam has revealed.

-- Short sales. Buyers need to be leery when a "seller" in a short sale commits to paying closing costs. The bank is the seller, not the occupant, warns Christy Walker of RE/MAX Signature in Phoenix. As such, the bank has every right to renegotiate the fees or refuse to pay them at all.

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Credit Rescoring, Title Insurance May Pose Obstacles

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | November 9th, 2012

Do you know the difference between credit rescoring and credit repair?

Apparently, some lenders don't. As a result, they are refusing to fund mortgages they otherwise would approve.

At the same time, some title companies are starting to play hardball with borrowers who have recently undertaken home improvement projects. Even if the work is relatively minor, and even if it has been completed, the companies are refusing to issue title insurance policies, effectively stopping refinancings in their tracks.

For as long as Richard Temme of Woodland Hills Mortgage in Woodland Hills, Calif., can remember, title companies would write policies on properties with recent or ongoing construction as long as the borrower agreed to indemnify the company against mechanic's liens. But lately, the Southern California mortgage broker reports, title firms have become much more cautious.

The typical indemnification holds the title company harmless from any liabilities, losses, damages, expenses or charges the company may incur because of mechanic's lien disputes between the borrower and the contractor. Borrowers also usually agree to defend any action based on a lien and do all the things necessary or appropriate to clear the lien from the title.

But in an increasing number of cases, that is not enough, says Temme. "We've seen title companies declining to issue on many more loans" than in the past, he says. As a result, "even minor home improvement projects, recent or unfinished, can hold up or kill a loan."

This may be a California phenomenon, for the laws are different in different states. But in the Golden State, contractors, subcontractors and suppliers can file liens retroactively to the day they started their work or furnished materials.

If that date of the lien is prior to the day the mortgage is closed, the lien, not the mortgage, is in the first position. As a result, some title agencies are not writing policies unless the borrower can put a much higher level of net worth behind the indemnification, says Temme. And some are not accepting any indemnification at all.

Meanwhile, otherwise good loans are being rejected by lenders that confuse rescoring with credit repair. They are not the same.

Credit repair is often a scam. In fact, attorneys at the Federal Trade Commission say they've never seen a legitimate operation that offers to erase bad credit; create a new credit identity on your behalf; or remove bankruptcies, judgments, liens or bad loans from your record. If the bad information in your file is correct, there is nothing that can be done to remove it, at least not legally.

No wonder lenders want nothing to do with applicants who have paid someone to clear accurate data from their records. If you have bad credit, after all, you are probably a bad risk.

Rescoring, on the other hand, corrects errors in your file, which may result in an increase to your all-important credit score.

Whereas credit repair firms are not legitimate, the 70-odd companies that provide rescoring are credit reporting agencies that work with the national credit repositories -- Equifax, TransUnion and Experian. As resellers of credit information contained within the three repositories, they not only provide the majority of all credit reports but also have a legal obligation to you and your creditors.

Moreover, according to Terry Clemans of the National Credit Reporting Association, rescoring is a program developed in conjunction with and processed through the big three. Indeed, each repository maintains a special rescoring department that deals directly with resellers.

When a credit file is rescored, it is checked twice for accuracy, first by the reseller and again by the national repository. It is, says Clemans, "one of the safest transactions for any creditor because everything is double-verified."

If a change is warranted -- say, a trade line was reported incorrectly, or the damaging information is not yours at all but someone's with a similar name -- the miscue is corrected at the repository level and a new credit report and credit score are issued.

If you believe data in your credit file is incorrect, you can have it removed on your own if you have the time and patience. It can take anywhere from 30 to 45 days. But if you are in a hurry, you can pay a reseller to do it for you, usually within 24 to 72 hours, says Clemans. The cost ranges from $50 to a few hundred bucks, depending on how complex the problem or problems.

Rescoring has been a popular service for seven or eight years, according to Clemans, and he thinks some lenders are so worried about bad risks that they are "confusing" credit rescoring with credit repair. He calls it a "knee-jerk reaction after all the pain" resulting from the mortgage meltdown.

"I have heard from lenders that ... are claiming they are trying to protect themselves from consumers 'gaming' the system for better rates," he says.

But as the NCRA executive sees it, lenders that object to rescoring are basically telling a consumer seeking a quick resolution of incorrect data that they can't have it corrected for that particular loan application. As a result, he wonders whether it is lenders who are gaming the system in an effort to force borrowers into higher interest rates.

Whether or not that's true, there's little would-be borrowers can do besides take their business elsewhere -- or sue the lender under the Fair Credit Reporting Act.

As far as mechanic's liens are concerned, Temme, the California mortgage broker, is telling his refinancing customers to advise the title company in writing of any construction or rehab projects on the property. Otherwise, he says, if a lien is filed, the title company may sue for the amount it has to pay the lender to pay off the lien.

And tell the title firm early. Even if the company will accept an indemnification, the process can take weeks, he says, noting that loans can be lost during that period.

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Finding the Best Mortgage Service

The Housing Scene by by Lew Sichelman
by Lew Sichelman
The Housing Scene | November 2nd, 2012

More than a third of all potential borrowers would be willing to pay a higher rate if the mortgage came with superior service, according to a new survey.

The poll by the Carlisle & Gallagher Consulting Group didn't say how much more the 34 percent were willing to pay. But it did find that the "Pay Mores" are a frustrated bunch.

More than half think the process is too slow. A third find it impossible to track the status of their loan application, an equal percentage say it is too difficult to talk with their lender, and a quarter don't believe the advice they receive.

All this tells Tom Mataconis, vice president of consulting for the firm based in Charlotte, N.C., that banks must do a better job to win market share. But it doesn't tell borrowers how they can determine which lenders offer the best service.

An obvious starting point is to ask your real estate agent. Agents know which lenders keep their promises and close quickly without incident. After all, their livelihoods depend on it.

Also quiz friends, co-workers and relatives about their experiences. People love to talk, good or bad.

Beyond that, prospective borrowers should look for several attributes that will help them find a responsive company or accessible loan officer.

For starters, look for a consistent point of contact. Federal regulators have already settled on this as a requirement for loan servicers -- the companies that collect payments, disburse funds to cover property taxes and homeowners insurance, and otherwise administer loans -- so why not one for borrowers?

"Many lenders have discovered that consumers appreciate a single contact, someone they can reach out to for help or support at any time," says Andy Crisenbery of the mortgage technology company eLynx.

At the same time, you may not want to be bothered during certain periods of the day. If that's the case, make certain your feelings are known, suggests David Lo, director of financial services at J.D. Power and Associates, the market research firm that judges customer satisfaction in various industries. If you want to be reached only by email or only by phone between 9 a.m. and 5 p.m., tell the lender.

Crisenbery also says you'll have a better experience if the lender has a way to get the necessary loan papers to you as quickly as possible. If you are old-fashioned, that might be by fax or overnight delivery. But if you are more hip, it could be via the Internet.

Many institutions are putting all the documents the borrower needs to review directly into an online portal, the eLynx vice president reports.

His company offers a product called eDelivery, which delivers documents by email "almost instantaneously" and which requires several layers of authentication, making it more secure than regular email.

At a recent Mortgage Bankers Association conference in Chicago, an eLynx competitor called LenderMobile launched an app for iPads (and, soon, for Android devices) that allows customers to fill in the standard 1003 application form and otherwise check on the status of their loans, all from their mobile device.

The lender also can set up the app to notify customers when rates hit a desired target or change enough to meaningfully impact monthly cost, either up or down.

The app "puts the entire process in the borrower's hands," vice president Lovina Worick says. "You can even take a picture of a required document and send it straight to the loan file."

At the same show, Kofax debuted software that allows lenders to not only snap photos of W-2s and other support documents with their smart devices but also to extract data from the photos and use it to populate loan applications, all from the kitchen table.

You'll also want to deal with a company that provides up-to-date status information. There's nothing worse than chasing down an unresponsive loan officer to make sure this document or that report has been received, or to find out whether underwriting has looked at the application.

"One complaint borrowers have with the industry relates to the lack of timely status updates," says Crisenbery. "By providing real-time updates, borrowers will know exactly what's happening with their loans."

Beyond technology, Lo at J.D. Power suggests picking a lender that promises to provide the closing documents prior to closing. That way, you'll have plenty of time to find any discrepancies between the initial quote and what's now on the closing sheet, and to have the loan officer explain the differences to your satisfaction.

Speaking of accurate closing costs, LendingTree, the online mortgage search engine, recently asked the 300 companies on its network which questions borrowers should be asking. The top answer: What are the total costs involved in the loan?

In that regard, shopping website MortgageMarvel.com now guarantees that the charges quoted by one of its lenders will be within $50 of actual charges. If they're not, it will pay borrowers up to $2,500.

"We believe it's important for consumers to understand and know these costs as early as they can in the mortgage application process," CEO Rick Allen says. "We've worked hard to make sure the closing fees they see on our site are accurate, and we're willing to stand behind them."

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