What is Title?

The word “title,” can mean a number of things. In real estate, “title,”refers to one’s right to ownership, or any form of evidence of land ownership. Title is your rights to the land and improvements.

 What is Title Insurance ?

Title insurance is a protection mechanism that will protect you against any kind of damage caused by a defect in the title. Defect in a title?  What?  A title can be defective for a number of reasons such as forgery and impersonation.  Title insurance will protect against such defects as well as  the expenses incurred in defending the title (your right to ownership). Title insurance not only verifies ownership, it will also detect any possible “clouds” on your title. Clouds?  Unlike a defect,  a cloud implies that the title is not clear and these clouds could be in the form of IRS claims, liens, or other uncertainties of ownership.

Further, there are two different title insurance policies issued in every real estate sale. The first type is an owner’s policy, which will protect the new owner from any ensuing claims to the property. The second type is a lender’s policy, which will protect the lender against loss of an unpaid loan balance in the event of a claim.

Title insurance policies are important because they protect against possible non-recorded claims against your property and ensure free and clear ownership. As such, these policies benefit consumers in establishing safety and security in owning real estate.

To ensure the property is free to transfer title, the Title company will perform a search on the property using a “pin” or “permanent index number” which is each parcel of lands own unique ID number.  The title company will collect information about the property that is found in public records such as: the county recorder’s offices; property tax records; sometimes in county courthouses.  

Who Pays for Title Insurance?
Title can be paid in a number of ways, but the most common is for the buyer and the seller in a transaction to pay for  a policy. There are two types of policies: a lender’s policy and an owner’s policy. As far as the lender’s policy goes, it is usually paid for by the buyer of the real estate. The owner’s policy is paid for by the seller of the real estate.

Did you ever wonder what happens at closing in a real estate deal?  Many think of it as a time where a bunch of documents are signed.  What does the signing of the documents actually accomplish?

Officially, a closing is the culmination of the entire real estate transaction and here is what happens:

• Documents that tranfer the ownerhsip of the property from one party to another (conveyance) and other required instruments are signed and delivered
• A monetary accounting is conducted between the parties based upon the Real Estate Settlement and Procedures Act (RESPA)
• Parties determine if condition of title is acceptable
• Funds are deposited with title company
• Money, in the form of checks is given to the Seller, Listing Agent, Selling Agent and on occasion the buyer, the buyer/seller attorney (referrred to as disbursements) per the HUD-1 by the Title company (escrowee) as directed by parties
• Ownership of the property is transferred
• After closing, the documents of conveyance are sent to the county recorder’s office for recording by the Title company

Below is a chart that shows the common costs in a real estate transaction along with who is typically responsible for paying them.  The chart was provided by First American Title. 

HOW MUCH MORTGAGE CAN I AFFORD?

Lenders look at  ratios when they consider your application for a mortgage loan. A debt-to-income ratio is your monthly expenses compared to your monthly gross income. Lenders consider two ratios for your application:

• Monthly housing expenses as a percentage of income
• Total monthly debt as a percentage of income

Both ratios are important factors in determining whether the lender will make the loan.

Lenders usually require the PITI (principal, interest, taxes, and insurance), or your housing expenses, to be less than or equal to 28% of monthly gross income. Lenders call this the front-end ratio. In other words, if your monthly gross income is $5,000 or $60,000 annually, your mortgage payment should be $1400 or less:

$5,000 x 28% = $1400 – maximum monthly housing costs

Lenders usually require housing expenses plus long-term debt to be less than or equal to 33% to 36% of monthly gross income. Lenders call this the back-end ratio. In other words, if your monthly gross income is $5000, the combination of your mortgage, $1400, and other long-term debt should be no more than $1800:

$5000 x 36% = $1800 – maximum total debt

If your debt-to-income exceeds these ratios, talk to your lender about your options.  Some lenders allow up to a 41% back end ratio.

BASIC MORTGAGE OPTIONS

15-YEAR MORTGAGE

• Lower interest rate
• Build equity faster
• Less interest to pay
• Larger monthly payment

30-YEAR MORTGAGE

• Higher interest rate
• Build equity slower
• Can deduct more interest
• Lower monthly payment

FIXED RATE

• Interest rate stays the same for the term of the loan
• Interest rates could go down while you are locked into your mortgage at a higher than market rate

VARIABLE RATE

• Interest rate can increase or decrease during the term of the loan
• You might have a low rate for an three, five, seven, or ten years
• Monthly payments can be lower than fixed rate loans

BALLOON MORTGAGE

• A loan that has level monthly payments that will amortize it over a stated term (e.g., 30 years)
• Requires a lump sum payment of the remaining principal balance at the end of a shorter term (e.g., 10 years)
• Interest rate stays the same for the term of the loan

QUESTIONS AND CONSIDERATIONS TO USE WHEN CHOOSING A LENDER

HOMEBUYER ASSISTANCE PROGRAMS

There are a number of different programs available for first-time homebuyers. The following are just a few examples of the programs available.

FEDERAL HOUSING ADMINISTRATION (FHA) INSURED LOANS

The 203(b) is the most common FHA loan, featuring:

• Low down payment
• Flexible qualifying guidelines
• Limited lender fees
• Maximum loan amounts

DEPARTMENT OF VETERANS ADMINISTRATION (VA) INSURED LOANS

Features of VA loans include:

• You must be an eligible veteran
• There are no down payment requirements
• Competitive and negotiable fixed interest rates
• Limitations on closing costs
• Longer payment terms

There is both a “streamlined” and regular version of this loan. The streamlined version has less cost and hassle and is only available to owner occupants and investors are not allowed. The FHA 203(k) streamline loan is available to borrowers of all income levels, to homeowners who plan to occupy the house, and for homes with one to four units.  There are three types of loans currently available, 15 or 30 year fixed or one-year arms.

According to the FHA website, there are three uses of the 203(k) loan:

• “To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.
•  To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it
•  To refinance existing indebtedness and rehabilitate a dwelling”

My post will focus on using the 203(k) loan to buy an uninhabitable property that is being sold in “as is” condition.

When shopping for a foreclosed property, the first thing to consider when choosing a lender is: Are they able to offer you this type of loan?   If not, and your property needs improvement prior to occupancy, you should find another lender.  Lenders who are able to provide the 203(k) loan can be found on the HUD website.

The following property types are eligible:

• Condos
• Town Homes
• Single Family Homes
• Mixed Use (Storefront)

To obtain a 203(k) loan there is a minimum $5,000 requirement of eligible home improvement projects on the existing structure of the property. Minor or cosmetic repairs may be included after meeting the first $5,000 worth of repairs.

Of course, if you are buying a condo, you will also be subject to minimum down payment and credit score requirements, which you can read more about here. In addition, only 25 percent of the total number of units in the development can be undergoing rehabilitation at any one time.

Another factor important to be aware of is that an approved HUD Consultant must oversee the repairs.  The process begins with a feasibility study, overseen by an approved consultant. Through this process, the FHA determines whether the improvements would be justified upon completion.  If the estimate of the property’s value after the repairs required in the feasibility study does not equal or exceed the loan amount, then no loan will be granted.

Prior to the start of any work, the consultant will provide a work write-up, which is an item-by-item breakdown of each item to be repaired and the estimated cost. Once agreed upon, the lender will order an appraisal based on the write-up. The appraisal will give an “after-improvements” value. After this step is complete, contractor bids can be solicited. Acceptable bids cannot exceed the cost given in the write-up.

After this step is complete, the loan goes through the normal underwriting and closing process and an initial payment for the purchase of the property is made. The lender holds the remaining funds until the work is completed. As the rehab progresses, requests can be made to pay contractors for work done to that point. The consultant will perform an inspection, and upon approval the lender will release the requested funds. This continues until the completion of the project. If money is left over, it can be used for additional improvements, or reducing the loan’s principal balance, but it cannot go back to the borrower.

Besides the hassle of completing the repairs, the other drawback of these loans is that they tend to come with an interest rate of up to 1% higher rates than the traditional FHA loan.  To get around this, borrowers can refinance the home after the repairs are complete.

Additional information on the 203(k) loan can be found on the FHA Website.

Buying a short sale can allow you to get a pretty good deal on a property that is selling under somewhat distressed conditions. The seller wants out of the property, often to avoid foreclosure, and the property is selling at a price that will net the lender less than what is owed them. However, before you go down this road you need to decide if you can handle the concept of a short sale. Not everyone can.

First, you need to understand the strange dynamics at work in a short sale. The seller still owns the property and is still the seller. However, the lender is really the one in the driver’s seat since they have to approve a deal that will result in them accepting less than a full payoff. The result is that the lender can’t do anything without the seller’s permission and the seller can’t do anything without the lender’s permission. And the lender may have all sorts of very particular rules about what they will and will not permit in a short sale. For example, they don’t want the seller getting a single dime out of the transaction because if there was a dime to be had it should rightfully be theirs since they are the ones getting short changed. And, as you might expect, this is bureaucracy at its worst. You are often dealing with some low level administrative type who gets yelled at all day and is suffering from a false sense of importance. They give meaning to their life by saying “no” and there is no master list of stuff that they say “no” to. In fact, that’s what makes life so much fun for the low level bureaucrat. They get to surprise you with their “no” when you cross the line. Present a request to them with the wrong packaging and “NO!”. For instance, you might get a bank to give you a credit for an unforeseen repair or you might get them to approve a lower price but they might balk at giving you a credit for lost rent or a proration of rent for the current month. Therefore, if you want one thing you might need to call it another thing. When you are dealing with a short sale you are not in a rational world. The bureaucrat will gladly lose $100,000 to foreclosure rather than pass up the opportunity to exercise their pathetic authority.

It gets even more complicated as you consider the seller’s position in a short sale. You need to understand a basic concept: As the buyer in a short sale you are NOT doing the seller a huge favor. If anything, the seller may be doing you a favor. First, you are dealing with someone who is financially on the ropes. Odds are they have no money. They may be considering other alternatives to a short sale such as deed in lieu of foreclosure, letting it go to foreclosure, or even personal bankruptcy. If the property is not their primary residence, the amount of money the bank is going to lose on the deal becomes taxable income to the them (the seller). So, the seller may not care one way or the other. They may have moved into their mother’s basement or just checked out of the process, waiting for the worst roller coaster ride of their lives to end. They may not be getting their mail or returning anyone’s phone calls. So you are not going to get any money from the seller, they are not going to fix any problems, and there is no point in having your uncle, who is an attorney but not a real estate attorney, badger them with official looking correspondence that make demands on them.

Here is the bottom line. When you buy a short sale, you are shopping in the bargain bin. This is a closeout. Irregulars. Merchandise sold as is (for the most part). No returns.

Can you handle that? If so, you might pick up a great bargain.