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Archive for the ‘Loans and Lending’ Category

Land Contracts have come back in vogue as lending standards have tightened.  Land Contracts are essentially a form of Seller financing.  In a nut shell, the buyer pays the Seller in installments over a period of time until the total purchase price is paid in full. 

A buyer’s ownership interest in a Land Contract differs state by state.  So do enforcement provisions.  In Wisconsin, a land contract buyer is deemed to have “equitable title” upon signing the land contract.  This means that, for all intents and purposes, the Buyer owns the property and the seller owns a right to get paid.  This is why the seller needs to think like a bank.

If a bank won’t extend long-term financing to the buyer, why should the seller?  The short answer is: the seller needs the money, needs the sale, and needs it now.  Nevertheless, the Seller still should act like a bank by asking for credit reports, payment history, assets and liabilities, and a decent down payment.

Many (if not most) land contracts are structured so that the Buyer will make payment for a number of years and then make a balloon payment at the end.  A typical land contract might have the Buyer making 36 monthly payments of $1200 and then paying the balance in full at the end of the third year.  In this era of strict loan standards, a buyer with poor credit won’t be able to refinance in year 3 unless he has great credit and equity in the property.  That is why a seller should want to know at the front end whether the buyer has good credit (or terrible credit).  If the buyer has terrible credit, what are the odds that he will be able to refinance in the next 3 years?

And, the worse the Credit, the more the Seller should want in a down-payment.  A buyer with poor credit is also more likely to incur judgments or tax liens that can attach as liens on the property.  Once this happens, the seller’s only way to remove those liens (in Wisconsin) is to have them paid or to foreclose on the property.  Foreclosure is expensive.  Thus, a Seller that knows he is extending a land contract to a buyer with poor credit may want a large enough down-payment to cover these potential costs. 

The most important thing to understand is that only a licensed Broker or Attorney can draft a land contract on behalf of another in Wisconsin.  We strongly advise all sellers considering selling on a land contract to consult an attorney… and act like a bank.

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On January 1, 2010, new Federal Rules took effect, requiring lenders and home buyers and sellers to use new forms.  Specifically, lenders must use a new, standardized Good Faith Estimate (called the GFE) when taking loan applications.  And, at closing, title companies must use a new HUD-1 Settlement Statement (usually called the HUD).

The HUD has always been the document that discloses all closing costs.  The new HUD must disclose closing costs and must show how those closing costs compare to the lender’s original estimates on the GFE.  Thus, lenders cannot quote one thing and then charge a much higher price.  Indeed, the new HUD contains a 3rd page that shows exactly what was quoted on the GFE and compares those quotes to the actual closing costs.  Certain of  these charges are allowed to change and some cannot.   The amount of price difference that is allowed under Federal law is called the “tolerance” limits. 

 These “tolerances” for differing prices have caused confusion and problems for some lenders and title companies.  One of the most confusing aspects of the “tolerance” limits relates to the Owner’s Title Policy and the State Transfer Tax.  In many states, those charges are paid by buyers.  In Wisconsin those charges are virtually always paid by the seller (indeed, Wisconsin is one of four states that statutorily requires the seller to pay the Transfer Tax).  Nevertheless, the lender is required to disclose these seller fees to the buyer on the GFE.

Herein lies the problem.  When taking the loan application, lenders are required to disclose to their buyers fees that the buyer will not have to pay at closing.  If lenders fail to disclose these fees, there could be penalties or, worse yet, delays in closing.  And, more problematic yet, the transfer tax is one of the few fees that has a zero tolerance.  This means that the quote on the GFE must match exactly to the final amount charged at closing (even though it won’t even be charged to the buyer at closing).  The Transfer Tax, in Wisconsin, is based upon the purchase price, which lenders may not know  at the time of the loan application.  Even the smallest inaccuracy in the purchase price and transfer tax can lead to problems.

So what is a lender to do?  Lenders should disclose the owners policy of title insurance on the GFE.  Then, on the HUD, there will be a seller credit to the buyer for that same amount.  This is confusing, bur required under the new rules.  The American Land Title Association has taken the position that lenders in Wisconsin need not disclose transfer taxes as a buyers fee on the GFE.  And, as a practical matter, most lenders in Wisconsin have not been disclosing the Transfer Tax on the GFE. 

Homestead Title has a spotless record on preparing the new HUDs and complying with the new GFE rules.  While we’ve heard many lenders complain of difficulties and confusion relating to the forms, we have not experienced any problems on our end.  If you have any questions on the title or closing implications and rules of the new GFE (in Wisconsin), just call or email and we’re here to help.

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“Why do I need title insurance?”   This is one of the most common questions we receive.  A recent lawsuit by Bank of America may provide some insight.

In the height of the real estate boom, lenders loosened standards and sometimes recklessly approved loans.  Some even approved “liar loans” or “stated income loans” — loans in which the only real documentation to support the loan was the borrower’s good word (or sometimes not so good word).  As it turns out, some title companies were also loosening standards in an effort to win businsess and streamline practices.  One such practice was replacing true “title insurance” with something called a “lien protection plan.” 

A traditional title policy generally requires a title search to discover all liens, rights, and interests in the property.  Then, at closing, the parties can assure that all past liens are paid and no liens remain against the property.  Under the lien protection plans, by contrast, no title search was ever conducted.  Rather, the title company relied upon credit reports and promises and statements (affidavits) of the borrowers that they had no liens.  As it turns out, large numbers of these borrowers did in fact have liens and title problems.  

Bank of America is suing First American Corp. for thousands of unpaid title claims based on this lien protection program called QuickClose.  See LA Times Article, BofA Seeks To Pin Losses on Title Insurer.  The lawsuit is in its early stages and it remains to be seen whether the claims will stand up in court.  Regardless, the moral of the story is clear:  don’t discount the services and value of title insurance done right. 

Homestead Title has, of course, always conducted title searches for all policies.  When we issue title commitments before closing, we make a point of highlighting any potentially problematic items so that none of the parties are unpleasantly surprised at closing…. or worse, unpleasantly surprised after closings.

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New Federal reforms require lenders to follow strict guidelines on disclosing closing fees to their borrowers. The purpose is to give home buyers a more accurate understanding of lending and closing fees and allow them to shop for the best deal.

Lenders must now accurately disclose all closing fees at the time of application and stick to their quote. Nevertheless, some lenders are sidestepping the new rules with improvised and inappropriate practices.

See: “How are those new ‘good faith estimates’ working out?”

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