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American Management AssociationNew York Atlanta Brussels Chicago Mexico City San Francisco

Shanghai Tokyo Toronto Washington, D.C.

How to Avoid Financing Fiascoes and Other Real Estate Deal Killers

Tracey Rumsey

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Special discounts on bulk quantities of AMACOM books areavailable to corporations, professional associations, and otherorganizations. For details, contact Special Sales Department,AMACOM, a division of American Management Association,1601 Broadway, New York, NY 10019.Tel.: 212-903-8316 Fax: 212-903-8083E-mail: [email protected]: www.amacombooks.org/go/specialsalesTo view all AMACOM titles go to: www.amacombooks.org

This publication is designed to provide accurate and authoritativeinformation in regard to the subject matter covered. It is sold with theunderstanding that the publisher is not engaged in rendering legal,accounting, or other professional service. If legal advice or other expertassistance is required, the services of a competent professional personshould be sought.

REALTOR is a registered collective membership mark that identifies areal estate professional who is a member of the National Association ofREALTORS and subscribes to its strict Code of Ethics. AMACOM usesthis term throughout this book in initial capital letters or ALL CAPITALletters for editorial purposes only, with no intention of trademarkviolation.

Library of Congress Cataloging-in-Publication Data

Rumsey, Tracey.Saving the deal : how to avoid financing fiascoes and other real estate deal killers /

Tracey Rumsey.p. cm.

Includes bibliographical references and index.ISBN-13: 978-0-8144-0030-2ISBN-10: 0-8144-0030-21. Mortgage loansUnited States. 2. House buyingUnited States. 3. Real estate

businessUnited States. I. Title.

HG2040.5.U5R86 2008333.3380688dc22

200703312

2008 Tracey Rumsey.All rights reserved.Printed in the United States of America.

This publication may not be reproduced, stored in a retrieval system, ortransmitted in whole or in part, in any form or by any means, electronic,mechanical, photocopying, recording, or otherwise, without the priorwritten permission of AMACOM, a division of American ManagementAssociation, 1601 Broadway, New York, NY 10019.

Printing Number

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Contents

Introduction vii

Chapter 1. Smoothing Out Title Tangles 1

Chapter 2. Preparing Realistic Net Sheets 17

Chapter 3. Pre-Approval Letters: Reading Between theLines 28

Chapter 4. Dates, Deadlines, and Details 36

Chapter 5. Bankruptcy: Clear Up Misconceptions 48

Chapter 6. Divorce and Separation 54

Chapter 7. Mortgage Approval Income Rules: Timing IsEverything 65

Chapter 8. Understanding FHA Loans Helps You HelpClients 78

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C O N T E N T S

Chapter 9. First-Time Homebuyer Programs: BeginnersLuck 91

Chapter 10. HUD Homes: Guiding Your Bargain Hunters 100

Chapter 11. VA Loans: Well Worth Learning the Ins andOuts 107

Chapter 12. Flood Zones: Crossing Muddy Waters 121

Chapter 13. Risk Underwriting and Mortgage Loans 129

Chapter 14. What You Should Know About HomeownersAssociations 150

Chapter 15. Home Inspections: Preventive Measures 158

Chapter 16. Appraisals and Sale Prices: Pulling ItTogether 164

Appendix A. State Housing Agency Information 173

Appendix B. Home Listing Checklist 179

Appendix C. Homebuyer/Offer Checklist 181

Appendix D. Flood Zones Defined 183

Index 187

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Introduction

Lessons learned the hard way: All of us have them, and Real-tors are certainly no exception. Sometimes the deal died.Sometimes it was only delayed. But the negative situation leftin its wake disappointed clients and wasted time. Not onlyare these lessons painful and sometimes embarrassing, but inthe real estate world, they are costly. The buck stops heretakes on a whole new literal meaning when your sale blowsup two days before settlement!

As a mortgage loan officer, I have seen firsthand all toomany ways a deal can fall apart. So it seemed to me thatsomeone should keep track of all these things that can ruin adeal, as well as the things that you, as a Realtor, can do tosave the deal. My idea was to write them down and pass

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I N T R O D U C T I O N

them on to other agents so that the same mistakes arent re-peated again and again.

The best news of all is that clients will love you whenyouve got all this information at your fingertips. You cananswer their questions and provide them with valuable ad-vice during every stage of the deal. Youll be able to warn ofpotential problems before they result in a disaster down theroad. Remember that, in many instances, this is the first timethey are buying or selling a home. But even if thats not thecase, its not something they do every day, so being able toguide them through the process will make you their heroand probably turn them into a repeat client down the road.

The Realtor education starts with the pre-licensing phase.Educators teach you to pass a test. Your focus is contracts,law, and the language of real estate. You then find a job witha brokerage that promises to mentor and train you into asuccessful agent. Now you are in the never-ending marketingstage of your new business. Phone calls, door hangers, mail-ers, relationship building: You are doing it all. Or maybe youare starting as an assistant to someone else. Whatever thepath, its at this stage of your career that your license anddazzling personality arent enough. Youve got to bringsomething extra to the dance.

You will be advised to build a team to support yourfledgling business. This is a critical part of your success, Iagree. So you go out to gather your lenders, title companies,home inspectors, etc. that will make up your trusted panel ofprofessionals. Youve lined up an A1 list of the best-of-the-best in your area. Giddy with the expertise firepower this

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group of gurus provides, you can hardly wait for the nextclient to appear.

But youre making a big mistake if you simply decide thatyour job is to market, market, market and youll let everyoneelse do their job, never bothering to understand what it isthey do. Unless you have the luxury of working in cash trans-actions, the world of mortgage and title will make or breakevery deal. And the more you know about these areas, thebetter.

Education and proactive thinking are the keys to lead-ing your transactions instead of huddling in the corner withyour fingers crossed. Prepare yourself to wow the client bybeing ready for those frontline questions that will be fired atyou upon your first contact with a buyer or seller. In a perfectworld, a buyer comes to you fully pre-approved and a selleraware of his or her propertys title status. Your reality is thaton a Saturday afternoon, a buyer walks into your open housewith more questions about mortgage qualifying than aboutthe house you are showing, and many sellers are listing whilein crisis mode due to death or divorce.

So in this proactive education spirit, I started compilingnotes during staff meetings and chats with underwriters, Re-altors, escrow officers, and other loan officers. Id overheara horror story about a closing that happened (or didnt hap-pen) and think, Geez! Somebody should write that down!Somebody should tell somebody! As a continuing educationinstructor, my classes were ripe with real estate agents andloan officers sharing their nightmare scenarios. As a loan of-ficer, new clients would come to me in tears after their loanfell apart with another lender. Of course, they needed a new

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loan and speedy settlement or they will lose the house oftheir dreams. Some experiences were unique, but frequentlythe problems were the same. Hence, more proof that some-body should do something!

For the next five years I listened, I interviewed people,and I wrote down what I heard. I can now offer you thisounce of prevention to avoid the painful pound of cure toomany have experienced. Every Realtor accumulates a diverseset of experiences. Every deal is different. Every buyer andseller defines what you have to offer. My goal is to ramp upyour knowledge base in a short amount of time with no painat all! No delayed transactions. No dead deals. No lost com-missions. I want you to be the forward-thinking hero whosafely guides your transaction through the mortgage and titlemine field and on to a triumphant settlement! (Tights andcape are optional.)

P.S. During the writing of this book we have seen anunprecedented change in the mortgage industry. The changesto or elimination of many types of loan products is forcinglenders and Realtors to work again within the parameters ofconventional, FHA, VA, and state housing lending. In otherwords, its back to the basics.

This book will provide a great refresher to those veteranagents who have gotten rusty on these products, and it canhelp newer agents get up to speed faster as they work tire-lessly to get each transaction to settlement. I believe yourfuture success at moving your listings and representing quali-fied buyers will be directly tied to your knowledge of theseloan types.

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Because my entire career has been centered around thistype of lending, several chapters are specifically dedicated tothese very products. Good news for you, since this will bethe lending environment you have to navigate in for the fore-seeable future. Read on, learn much, and laugh when youcan. Were all in for a bumpy ride.

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C H A P T E R 1

Smoothing Out Title Tangles

Real estate title: Its the evidence of legal ownership of theproperty you are trying to help your client sell or buy. Some-body owns the house. Somebody wants to buy the house.Sign a deed. Record a deed. Seems like a pretty simple de-scription of the entire transaction, right?

Now insert variables like death, divorce, bankruptcy, andwar. Add in multiple owners under various legal entities.Suddenly its not so simple anymore.

The following examples will give you some perspectiveon problem solving many issues right from the start and

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S AV I N G T H E D E A L

avoiding the dreaded last-minute mayhem that can descendon your deal.

DIVORCE DILEMMA

Its a glorious day! You just listed a home, the golden gooseof the real estate sales world. Youre excited! Your sales pre-sentation was sharp. You researched the comparable sales inthe neighborhood. Jake and Rhonda Miller are such a cutecouple. You gave them fabulous, inexpensive staging tips tohelp the home show better. They loved you. They listed withyou. Are you good or what?

Fast forward ten days. Your listing is under contract andthe Millers really love you now. Youve helped them find theperfect new home and you are planning on concurrent settle-ments in three weeks. Your favorite title person (part of youruber team) calls to ask if you know how to contact RachelMiller.

Who is Rachel Miller? you ask.The person holding title to your listing with Jake

Miller, she replies. Sorry I didnt ask sooner but the nameswere similar; you know, Rhonda and Rachel. My assistantjust caught this today.

Oops! Must be an ex-wife, you respond. No prob-lem. Ill call Jake and get some contact information. Funny,Jake never mentioned this when I met them to list the house.Im sure it will be an easy fix since Jake wasnt concernedenough about it to say anything. Ill call you soon.

You call Jake.

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SMO O T H I N G O U T T I T L E TA N G L E S

Hi, Jake. Its me, your Realtor Extrordinaire, you say.Sorry to bother you at work but the title company justcalled to let me know that you are holding title with RachelMiller, not Rhonda Miller. Can you fill me in?

Oh, sure, Jake answers. Rachel is my ex-wife. We di-vorced three years ago. I was awarded the house in our di-vorce decree and we agreed on an equity buyout. I paid herand she signed a quit claim deed. Its all been taken care of.I thought everything had been done.

Great! you exclaim. We just need to get that quitclaim deed recorded at the county and well be back ontrack. Do you have it?

No. Rachel said she signed it and took it to the county.We werent fighting about anything. I assumed she did it. Weparted on good terms and we still stay in touch.

Could one of the attorneys involved in the divorce haveit?

We didnt use attorneys. We wanted to save the moneyso we filed ourselves with one of those forms we found on-line. This isnt going to be a problem, is it? he asks, irrita-tion creeping into his voice. Weve already turned in ourchange of address forms at the post office and scheduled themovers. Rhonda has already put a deposit down on new car-pet for the family room.

This shouldnt be a big deal, Jake, you answer, keepingyour tone light but assured. If you can just call Rachel, andget the original form from her, that will take care of things.Worst case, the title company can prepare a new quit claimdeed and well have her sign it. Problem solved.

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Well, then, I guess we do have a problem, he says,angry now. Rachel left last weekend for vacation. She

Okay then, you interrupt, making sure to remain opti-mistic, well just contact her at her hotel and have a newdocument sent to her there by FedEx. She can overnight itback. Do not panic, you think to yourself. Im in control.Im the agent he loves. Keep him calm.

No, we cant, he says in exasperation. She is back-packing in the Patagonia region of the Andes. For sixweeks. Silence. He is awaiting your response.

Oh, you reply. Well . . .Patagonia, you think. That sounds familiar. I should

know where that is. Isnt that a clothing label? Do peoplereally go there? Wherever it is, it doesnt sound like theres aFedEx drop. Oh my God, this isnt happening. Think! PlanC, I need a plan C!. Extensions: Well get everybody to agreeto a five- week extension. But what if they wont!? Ugh, whyme?

Now rewind to your first meeting with the Millers. Theyare still a cute couple. They still love you. The difference thistime is that youve done your homework and you ask aboutthe Rachel issue now, not later.

Ive looked at the county records and it shows the own-ers as Jake and Rachel Miller, you say. Tell me about Ra-chel so we can plan for addressing this issue up front.

That cant be right, Jake says. That was supposed tobe taken care of three years ago.

So you hear the story, and you outline the options for theMillers.

Wow, Jake says. Im so glad you said something

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today because I just ran into Rachels mom in the grocerystore and she told me Rachel is leaving next Friday andwont be back for six weeks. Some crazy backpacking trip inthe Andes with tents and the whole bit. I had no idea thishadnt been done. You are the best!

The lesson here is pretty straightforward: Never assume.Dont just ask a seller how they are holding title. Look itup. A little pre-meeting homework can prevent problems andreally impress a potential client. Whos going to get the list-ing? The Realtor whose presentation was a little flashier thanyours, or you, who walked in their door with a dragon inone hand and the sword to slay it in the other?

Many title companies offer access to a limited amount ofcounty title information through their websites. Many coun-ties are making information available online to the generalpublic. For a small fee, some counties will give you an ac-count with access to the actual abstract. You can print outdocuments recorded against that property. This instant ac-cess allows you to take that listing appointment at 4:00 p.m.today and still arrive prepared. In my opinion, it is wellworth the money to have the information sooner as opposedto later.

Now lets look at some more common title status situa-tions and how to deal with each one.

UNPAID CHILD SUPPORT

Unpaid child support can stop a settlement in its tracks, liter-ally at the settlement table. An escrow officer told me about

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a seller who made a comment at settlement about his childsupport payments. The escrow officer asked him if he wascurrent on those payments. He said no. Everything stoppedright there. The escrow officer then had to follow up on thisinformation, research with the child support enforcementagency any unpaid or overdue amounts, and collect themfrom the sellers proceeds. There were no judgments filed yetagainst the seller, but the escrow officer still had the obliga-tion to protect the title of the property that her company wasabout to insure.

Avoid embarrassment and frustration for you and yourclient by asking this question before the escrow officer does.(See Appendix B: Home Listing Checklist for how to incor-porate this and many more items discussed in this book assuggested questions for each new prospective seller.)

SELLER WHO CANT SELL, PART 1:THE WARRANTY DEED

Carol wants to sell her home. You discover at the listing ap-pointment that Carol recently lost her husband, Bill, to can-cer. This home holds too many painful memories and shewants to move on. She also tells you that this home was Billsbefore they got married; Bill is her second husband.

This explanation helps the pieces fall into place. Youdont want to repeat your experience with the Millers, soyou check the county records that morning and notice thatCarol does not hold title to the property she wants to sell.She goes on to tell you that Bill wanted her to have the home

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after he was gone, so he filled out a warranty deed that alocal title company prepared and had her put it in their safedeposit box.

You explain to Carol that the warranty deed will need tobe recorded at the county so that she can go forward withselling the house. You mention that your favorite title com-pany can assist her with this process as part of the sale. She isgrateful for your guidance. She knew something needed to bedone but wasnt sure what to do next. She wants to completethe listing paperwork and go forward. Another listing. An-other client loves you.

I can tell you that any attorney reading this over yourshoulder probably has gone into cardiac arrest about now.Terms like sleeper deed (warranty deeds executed and thenheld without being recorded) and validity are being sput-tered as well. I can also tell you that the above scenario, insome states, plays out without a hitch. In the real-life storyof Carol (I was the lender for the buyer of Carols home),things didnt work out so well. Heres what happened:

The warranty deed went to the title company, where itwas reviewed and dropped into the file for recording. Unfor-tunately, it was forgotten. Two days before settlement, thetitle company attempted to record the document, which wasrejected by the county due to improper execution (the deedhad been filled out wrong). Carol couldnt continue with thesale becauseyou guessed itshe didnt own the house.

Now we were looking at a minimum of eight weeks forprobate proceedings. My buyers didnt want to wait for eightmore weeks. They had to cancel moving trucks, find a stor-age unit to move their belongings into, and find a place to

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live while they looked for a new home to buy. Anybody seea lawsuit in that picture anywhere?

Here are two things you can do that might be a betterway to handle a seller like Carol and protect yourself fromsome ugly liability:

1. Dont take a listing until the seller actually owns theproperty, no matter how logical the explanation. Al-ways beware of sleeper deeds.

2. Direct the seller or sellers to a title company, or betteryet, to a real estate attorney to get documents re-corded immediately or determine the necessary pathto resolution.

In Carols situation, the above steps certainly wouldnthave avoided probate, but they would have started the proc-ess sooner and prevented you from representing a home thatcouldnt be sold.

SELLER WHO CANT SELL, PART 2:THE GUARDIAN

Richard wants to sell his mothers home. Richards motheris currently in a long-term care facility and her health is seri-ously deteriorating. Again, you did your homework and youknow that Richard is not on title to this home. When youbring this up at the listing appointment, Richard producesguardianship papers and explains he is his mothers court-appointed guardian.

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Everything seems official. We should be able to just pro-vide these documents to the title company and go forward,right? Wrong. Your title company will tell you, as soon asyou deliver these documents and the listing agreement, thatyour seller cant sell. Why? Because guardianship doesntgrant fiduciary power or the right to convey property. Con-servatorship is required to carry out these matters for an in-dividual. Richard needs to be named as conservator for hismother in order to proceed. Again, directing him to an attor-ney, sooner rather than later, can put this transaction on theright path.

SELLER WHO CANT SELL, PART 3:TENANTS IN COMMON

While working on this chapter, I have encountered yet an-other new example of a seller who cant sell. Just when Ithink Ive seen it all, I have a new curve ball hurled at myhead from the great real estate gods in the sky. (Do you seewhy I had to write this book? Once again, my pain is yourgain, and this item will be added to your Home Offer/BuyerChecklist. This will be just one more reason your clients willlove you and be loyal forever.)

I had the privilege of helping a young Ukrainian couple,Anya and Nikolai Zharov (names have been changed), pur-chase their first home in 2002. They were a joy to work with,as well as being an immigration success story. Attending thatsettlement and watching their 10-year-old daughters face

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light up each time we talked about her new bedroom wasdefinitely a highlight of my career.

Recently, I received a call from Anya. She needed myhelp. As she filled me in on the events of her life for the pastfive years, I discovered that Nikolai had died three years ear-lier in a car accident. Anya had since remarried and she andher new husband were considering selling the home and pur-chasing a new one. She wanted to discuss qualifying for anew mortgage, but her main concern was title-related. Howdoes this work when I sell the home? she asked. I still ownthe home with Nikolai.

I advised her that seeking legal counsel is always a goodidea as I am not an attorney; however, I added, having titletransferred solely into her name should not be difficult. HerTrust Deed (in Utah, we use Trust Deeds not Mortgages asour legal document) was prepared with the borrowers vestedas husband and wife as joint tenants. This implies fullrights of survivorship. She should be able to go to the county,present Nikolais death certificate, and that would be that.The county would record the death certificate and she wouldhave sole ownership of the home.

The next day, Anya stopped by my office, frustrated andlooking for more answers. When she went to the county andpresented the death certificate, they looked up her propertyand informed her that she would have to get an attorney.They provided her a copy of the Warranty Deed that wassigned by the seller conveying title to her and Nikolai andexplained that the deed was the problem. She immediatelybrought it to me.

Heres what happened: TheWarranty Deed, which is pre-

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pared by the title company for the seller to sign, (and shouldreflect the same verbiage as the Trust Deed) read herebyconvey and warrant to Anya Zharov and Nikolai Zharovand that was it. There was no vesting language whatsoever.The Warranty Deed is the document used to determine own-ership, not my Trust Deed. The county doesnt care what myTrust Deed says. Because there is no specific vesting lan-guage, the ownership is treated as tenants in common. Thereare no rights of survivorship. She, Anya, will have to probateNikolais half of ownership in the home.

Of course, this saga will continue. The document wasprepared in error and the borrower never approved it. Thereare liability issues here on the cost of probate, not to mentiona title policy that was issued, etc. While I cant yet tell youhow the story ends, I can convey this important three-partmessage:

1. Understand vesting language for your state.

2. Have the escrow officer/attorney explain the optionsto your client at closing to be sure that the clientswishes are carried out in the Warranty Deed.

3. At closing, request that you and your buyer see a copyof the Warranty Deed before it is recorded and verifythe vesting language.

Put these tips into your tool box and use them at everybuyers closing. You can never have too many preventativemeasures when it comes to title issues.

Now, on to more title tangles.

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THE B WORD

Bankruptcy can affect your sellers title depending on thetype and status of the bankruptcy. In a later chapter, welllook at bankruptcys effect on a buyers ability to get a mort-gage, but bankruptcy can have consequences for sellers, too.

Because bankruptcy can be embarrassing for sellers, theymay not volunteer the information. This is where the rightquestions up front can save everyone time and confusiondown the road.

The two types of bankruptcy most commonly seen inconjunction with sellers are Chapter 7 and Chapter 13.Chapter 7 allows the debtor to have certain debts dis-charged, in most cases with no obligation of repayment. AChapter 7 bankruptcy can be filed and completed in as littleas four months in some states, with a final Discharge ofDebtor signaling the completion of the process. Chapter 13allows for debt adjustment and a three- to five-year repay-ment plan, with a trustee collecting and disbursing the fundsto creditors. After the payment plan is complete, a Dischargeof Debtor is issued.

Sellers who have completed a Chapter 7 bankruptcy areno longer personally liable for the discharged debts. How-ever, any portion of that debt filed as a lien against theirproperty is still valid. Escrow officers tell me theyve seensome people go back to court and get the lien dismissed, butin most cases the lien stands. This may dramatically affect asellers proceeds at closing, as the title company will have tocollect funds to clear that lien. This is a little known factand can be an unwelcome surprise at closing. Also, sellers

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currently involved in filing a Chapter 7 bankruptcy will needto complete the process, in most cases, before the home salecan go forward.

Chapter 13 works differently. With permission from thetrustee, a seller is allowed to sell their home, buy a new one,or both during the re-payment process. A discharge is notnecessary. In my professional experience, trustee permissionhas been about a one-week process. Getting this process roll-ing right away will get you to a successful settlement thatmuch faster.

WHO IS THE SELLER?

Investors represent a much larger segment of the home buy-ing/selling clientele than ever before. In recent years, a strongreal estate market combined with new investor-friendly, low-or no-down mortgage products has made real estate invest-ment easier and more attractive to all kinds of people andgroups. Now throw in late-night infomercials and weekendseminars on getting rich in real estate and you end up withmore kinds of entities holding title to real estate than youcan shake a stick at.

So, you have a listing appointment and your title home-work reveals that this home is owned by Four Brothers, LLC(limited liability company), ABC Family, Inc. (corporation),Jones Family Trust, or the Acme Partnership. Whatever theentity, there are two big questions looming on the horizonfrom your title company as soon as you turn in this contractand order title work:

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1. Is this entity in good standing with the state?

2. Who is authorized to convey real property?

To answer these questions, a couple of things must hap-pen. The title company will check with the state to verifythat all filings and fees are up-to-date. If the entity is not ingood standing, your client will be hustling to fix that. Manytimes corporations that havent had much activity in pastyears get pulled out, dusted off, and used for the first time inawhile. Filings and fees get overlooked. A heads-up commentfrom you at the listing appointment will get things moving ifthis is a problem.

The next items to be checked will be a copy of the entitysArticles of Incorporation and Bylaws, Operating Agreement,etc. to determine who has the right to convey real estate. Ifindividuals are not specified, then all of the partners/officersmust sign. This can get a little crazy when the Acme Partner-ship is made up of six siblings, two of whom are not cur-rently speaking to the others, four who live out of state, andone who has a trip to Europe planned during your scheduledclosing date.

I dont mean to be overly dramatic, but Im not makingthis stuff up. Seasoned veterans of the real estate industrycan share these crazy stories all day long. Of course, the ma-jority of your investor listings will go off without a hitch. Itsthat one deal a year that will give you the ulcers. Again, ask-ing for documents up front, getting the proper signatures onyour listing agreement, and advising clients of challengesearly can keep a client returning year after year.

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POWERS-OF-ATTORNEY

A power-of-attorney is a handy little item that can save adeal when one of the buyers or sellers cannot be present tosign documents. The simple question, Will everyone be intown to sign on the day of settlement? is an important one.Using a power-of-attorney has become especially commonsince September 11. Quite often, overseas deployment ofmilitary/National Guard members prevents a client frombeing present for a settlement.

The problem with using a power-of-attorney for a realestate transaction is that it must be a specific power-of-attor-ney that includes the property address and is used solely forthe purpose of the transaction. It is typically drawn up by theescrow officer or attorney and then recorded at the county. Ageneral power-of-attorney will not work.

Military families are always frustrated when this factcomes to light. It is standard that a deploying soldier willexecute a general power-of-attorney for use by his or herspouse while they are gone. They assume that this is all theyneed.

Heres where you and your superior service come in.Once its determined that a client wont be available to signdocuments, you can start work on a game plan. Hopefully,the soon-to-depart signer is still around, so a power-of-attor-ney can be executed before they leave. Sometimes militarymembers already deployed can be easily reached and some-times they cant. Whatever the challenges, everyone appreci-ates the Realtor who provides this information at the first

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meeting rather than informing them weeks later that a prob-lem exists.

BUYERS AGENTS ALERT

In the introduction I mentioned leading your transaction.Leading means taking charge. The best offense is a good de-fense, etc. Call it leading, call it orchestrating. Call it babysit-ting, evensometimes a more accurate description. Thebottom line is, you have to do it or hire someone who will.

As the buyers agent, you might think, Title issues arenot my concern. The selling agent has to worry about that.Youre right. The selling agent should be on top of title is-sues. They should be detecting problems and working to rec-tify them before settlement, preferably before they ever tookthe listing.

However, the reality is you are always at the mercy of theexpertise level of the other agent. Dont assume anything.Review the title carefully. Ask questions and demand an-swers. Deals can be saved by proactive thinking at the begin-ning of the transaction. Blowups or delays just beforesettlement, no matter who is at fault, hurt your client andyour reputation. Your clients may logically understand thatthe problem had nothing to do with you, but there may stillbe negative emotions tied to you that may prevent them fromcalling in the future when they need an agent. Troubleshoot-ing title issues early in a transaction will help you remain theagent that they love.

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C H A P T E R 2

Preparing Realistic Net Sheets

Its time for me to get up on my soapbox. Wouldnt youagree that when someone sells a home, the most importantthing to the selleroutside of actually getting the homesoldis how much money they will walk away with? I soldmy home last year and I know that it was the biggest con-cern I had. Yet I am astounded at how many agents andtheir brokers share the attitude: Get the listing, get anoffer, and then talk numbers. Why would you do this? Iveheard, Well, we do sketch out some basics at the listingappointment and then look at things in more detail whenan offer comes in. Is your time not valuable? Can you af-

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ford to list a home that ultimately gets pulled from the mar-ket because the sellers cant afford to sell? Dont you wantto retain your title of Realtor Extraordinaire and be theagent they love?

Net sheets are a great springboard to successful clientrelationships and closings. You want to start a listing ap-pointment with the end in mind. If you want to set up real-istic expectations in the beginning, guiding the sellerthrough the numbers of that future final settlement state-ment is a must.

Lets say that you are a believer in the sketch-some-basicsapproach. At your listing appointment, you discuss salesprice, current mortgage balances, and your 6% commission.You sell the clients on your experience, sales track record,and proven marketing plan for their home. They love you.They list with you.

The second you walk out their door, unless these aresavvy sellers who clearly remember their last closing, theynow expect that if they get a full price offer they will walkaway with their sales price less their current mortgage bal-ance and your 6% commission. Thats what theyre countingon. Thats the number they keep using as they plan for downpayment on a new home, moving costs, equity split with theex, or whatever their expected final cash will be needed for.

Below is an example of a net sheet that will walk you andyour client through all of the costs of selling a home. Asidefrom any needed property repairs or pre-listing cosmeticfixes, this sheet will offer a realistic look at estimated finalnumbers on closing day. Lets look at it line by line.

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P R E P A R I N G R E A L I S T I C N E T S H E E T S

EQUITY WORKSHEET

TT Projected Sales Price: $______________

Less Selling Costs:

;; 1st mortgage payoff $________________ (prin bal + 1 mo int)

;; 2nd mortgage payoff $________________ (prin bal + 1 mo int)

;; Mtg pre-payment penalties$________________

;; Sales comm ____% $________________

;; Title insurance for buyer $________________

;; Closing & recording fees $________________

;; Utility assessments $________________

;; Property tax pro ration $________________

;; Buyers closing costs $________________ (if you agreed to pay)

;; Home warranty $________________ (if you agreed to provide)

;; Judgements/Debt payoffs $________________

;; Other ________________ $________________

;; Total Selling Costs: $____________________

TT Estimated Proceeds From Sale (the bottom line): $ ____________________

FIRST MORTGAGE PAYOFF

If you ask your clients what they owe on their first mortgage,they will typically grab their last statement out of a draweror jump online and quote you their current principal bal-ance. In their mind, this is what they owe on this mortgageand therefore this number represents an accurate payoff.This is an understandable assumption, but it is not quite ac-curate.

The way it really works is that mortgage interest is paidin arrears. When you make your June 1 payment you are

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paying interest for the month of May. If you are selling yourhome on June 28 your payoff will be calculated as the June1 principal balance (after your June 1 payment) plus interestfor each day of June until the mortgage company receives thepayoff. Hence my comment on this line: principal balance one months interest. This number will never be perfectlyaccurate, as we dont know exactly when the home will sell,how many additional payments will be made, etc. But withthe size of todays mortgages, that one months interest canbe thousands of dollars. It has a major impact on the bottomline, so you dont want to leave it out.

SECOND MORTGAGE PAYOFF

This is the same story as the first mortgage payoff. The inter-est works the same way. However, some clients dont realizethat the line of credit they took out at their local bank orcredit union was tied to their home. Ive seen this quite a fewtimes in mortgage applications. As I review a credit reportwith the applicant, I will see a line item that says mortgageor home equity. Their response is, Thats not a mortgage.Its just a line of credit I have. I then get to share the goodnews that this was recorded as a debt against their home andwill have to be paid off at closing when they sell.

This is just another reason why its so vital that you re-view the title report thoroughly after listing a property orresearch the property online before the listing appointment.Clients dont always understand their own situation.

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MORTGAGE PRE-PAYMENT PENALTIES

Mortgage pre-payment penalties are the new gotcha of themortgage world. Sub-prime mortgages are rarely done with-out them and sub-prime mortgages are more prevalent thanever. (Another soapbox Ill get on later.) The kicker is thatmost of the time, your sellers have no idea that they evenhave a pre-payment penalty. Since the title company gets thepayoff for the property, this ugly news may not come to lightuntil either the title company notices it on the payoff and letsyou or your client know, or worst case scenario, when youget to the closing table. Major unpleasantness!

Pre-payment penalties are common on sub-prime loansbecause they lower the initial interest rate during the first oneto five years, depending on the program. The typical pre-payment penalty goes something like this: If during the firstthree years of the loan, the borrower pre-pays more than20% of the principal balance, he must pay the equivalent of6 months of interest on the amount paid in excess of 20%.

Heres an example: Your clients owe $200,000 on theirfirst mortgage. Their current interest rate is 8.5%. They haveto pay a penalty on 80% of the $200,000 or $160,000.$160,000 8.5% / 12 months $1133.33 interest permonth. $1133.33 6 months $6800. Ouch! Thats a bigchunk out of their bottom line.

Second mortgages work differently. There are two typesof second mortgages: home equity loans and home equitylines of credit. Home equity loans typically dont have pre-payment penalties, but you have to check the loan docu-ments to be sure. Home equity lines of credit almost always

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have an early closure fee, typically between $250 and $500.Again, you have to check the specific wording and keep inmind that rules vary from state to state.

So what do you do if your client isnt sure? The best thingis to review their loan documents with them. Pre-paymentpenalties are usually spelled out on a separate documentfrom the actual note and trust deed. If documents cant belocated, then put the title company on alert that you needpayoffs quickly so you can determine the clients accuratemortgage debt.

SALES COMMISSION

This is just the straightforward calculation of your salescommission. Youve agreed to be paid when the home sells,usually a percentage of the final sales price. Many real estateoffices are now assessing transaction fees. If yours is one ofthem, be sure to include that fee in your calculation.

TITLE INSURANCE FOR BUYER

It is standard and customary that a seller provide a buyerwith a title insurance policy called an owners policy. Ratesvary from state to state on varying types of coverage and arebased upon the sales price of the home. If your listing is sell-ing for $250,000 your client could be looking at a title policyexpense of approximately $1300. Its not a detail you wantto leave until the last minute. Your local title company canprovide you with a convenient, reduced-size rate chart thatyou can keep with you to better estimate this expense.

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CLOSING AND RECORDING FEES

Whether you are closing with an escrow officer or an attor-ney, there will be some or all of following: closing fee, docu-ment preparation fee, attorney fee, notary fee, city, countyor state tax fees or stamps, and recording fees. Youll have tofamiliarize yourself with standard fees in your area and howto calculate them.

UTILITY ASSESSMENTS

Title/escrow companies will check with local utility provid-ers of water, sewer, sanitation, etc. to verify that thesecharges are current and paid up through to the closing date.Homeowners association (HOA) dues will also be verified,when applicable, to make sure that all assessments are satis-fied. If any of these are not current, they will be charged toyour seller at closing. Hopefully, these amounts are smalland not of major impact, but the question is important. Acondo owner with a $170 monthly condo fee who is sellingdue to financial difficulty could take a substantial hit if feeshavent been paid in several months.

PROPERTY TAX PRO-RATION

This is another market-specific item. Quite often, propertytaxes are paid in arrears. For example, here in Utah we payproperty taxes for the current year in November. That means

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that up until November every seller is going to have to pay apro-rated amount of property taxes to the buyer to compen-sate them for the November tax bill that will be coming theirway. The new owner will be liable for the entire bill when itis issued, even though they didnt live in the home the entiretime. This is where the tax pro-ration comes in. They get theold owners portion of the bill in credit at closing. Again, doyour research. Find out how much the property taxes areand learn how to estimate these pro-rations.

BUYERS CLOSING COSTS

Depending on your local real estate market and customs, aseller paying all or a portion of a buyers closing costs may ormay not be common. The majority of loan programs allow aseller to pay an amount equivalent to at least 2% (sometimesas high as 9%) of the sales price toward a buyers closingcosts and pre-paid items. If your seller has agreed to pay, itcan easily mean a bottom-line impact of $3000 to $8000not a small detail to overlook. If it is a common practice inyour local market, this can also be a great opportunity toeducate the client on the likelihood of this expense from thebeginning. Full disclosure and reality check: just another rea-son they will love you.

HOME WARRANTY

Home warranties offer a buyer protection for the first yearof home ownership against component failures of the home.

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Furnace, water heater, stove, air conditioning units, etc. canbe covered under this warranty. Coverage options vary fromone warranty company to another but this added blanket ofprotection can be attractive to potential buyers. There are noset rules on who pays for this. Ive seen buyers opt to pur-chase the coverage at their own expense. Sometimes sellersoffer to pay for it as an incentive to the listing. My personalfavorite is the Realtor who offers to provide the coverage aspart of his or her superior service and commitment to theclient. (What a great marketing tool for a Realtor to grabattention from prospective sellers and buyers!) Costs are usu-ally $300 to $400. Talking to sellers early about home war-ranty coverage and preparing them if its standard in yourmarket for a seller to provide it will just be another featherin your cap.

JUDGMENTS/DEBT PAYOFF

This line item takes into account any outstanding judgmentsagainst the sellers that a title company and lender will re-quire be cleared at settlement, and/or any debt that must bepaid in order for this settlement to go forward or to help theseller qualify to purchase a new home. Sometimes there areequity payoffs to ex-spouses that were agreed to in previousdivorces.

In Chapter 1, I talked about bankruptcy and how judg-ments dismissed against someone personally in a Chapter 7filing may still stand as a lien against his or her property.

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This is one reason why the B question can be so importantwhen listing a home.

Another little known fact is that title companies andlenders usually require that all judgments associated with thesellers be cleared at settlement. This really took one buyer bysurprise. Heres what happened:

A Realtor and fellow writer called me one day and said,Tracey, Ive got a story for your book. He went on to ex-plain that a seller on a current listing was just informed bythe title company that his disregard for child support pay-ments had finally caught up with him. (They, of course, usedmore professional and delicate wording.) The seller was ex-pecting about $35,000 in profit at his settlement. However,the $30,000 outstanding judgment from the state child sup-port enforcement authority was going to reduce that profitconsiderably. The seller didnt mention this issue at listingand was apparently thinking it didnt matter. The Realtorhad no way of knowing until the title company found thejudgment, as they are not recorded against real property onthe county records. Occasionally, a lien that is recordedagainst property will go on to court to become a judgment,but in most cases, judgments are for debts not associatedwith real property. So the seller went forward with the sale,but not in a cheery fashion.

OTHER

This is the catch-all line where you put any other concessionsthe seller has agreed to pay. This could include paying for

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the home inspection, termite inspection, a carpet and paintallowance, or maybe a repair escrow. Repair escrows areusually associated with FHA or VA loans that have specificproperty condition standards. If the necessary repair cannotbe completed prior to closing, usually due to inclementweather, a repair escrow is established so funds are availableto complete repairs as soon as possible.

Using this net sheet will walk you and your sellersthrough some important considerations as they list theirhome. Hopefully, the bottom line is appealing or at least ac-ceptable to the sellers. The worst case scenario is that, aftergoing through the numbers, your sellers realize that they can-not afford to sell at this time. Figuring this out from the startcan be a huge time and money saver for you and your client.Theyll remember you when their personal position im-proves. Youll be the agent they love.

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C H A P T E R 3

Pre-Approval Letters: ReadingBetween the Lines

Lets go back and revisit the Millers. You remember them, thecute couple who love you and everything youve done forthem. Lets say that you have multiple offers for their housecoming in on the same day. How do you help them analyzethese offers beyond the obvious consideration of offer price?How can you guide them to a successful settlement with aquality buyer?

The first rule to remember is, talk is cheap. Many agentsout there will write up an offer for anybody. They use thespaghetti-cooking approach to real estate (as do many loan

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P R E - A P P R O VA L L E T T E R S

officers): Throw it at the wall and hope it sticks. An offerdoes not guarantee that a buyer has been pre-approved bya lender. An offer doesnt guarantee that the buyer can getapproved for a mortgage. It just says, Hey, we like yourhouse and would like to buy it for this price. Thats nice,but it doesnt necessarily get the Millers to the settlementtable.

Purchase contracts allow a loan application deadline, im-plying that a buyer can start the loan process after an offerhas been accepted, but this probably isnt the best course ofaction for a buyer and it really puts the seller in a waitinggame. That being said, I know lots of excellent Realtors whoare very good at asking some key questions and moving for-ward with an offer for buyers who, for whatever reason,havent started the loan process yet. They turn out to begreat borrowers and all is well.

A competitive market dictates a much more aggressivepreparation for any buyer hoping to get an accepted offer ona property. The buyer should visit his or her loan officer andget fully pre-approved. The loan officer should issue thebuyer a letter of pre-approval or notify the Realtor of thepre-approved status so that a more custom letter can beprovided upon making an offer on a home. This custom pre-approval letter would match the sales price of the offer andany of the contingencies of the transaction, e.g., sale andclosing of the existing residence, seller to pay $3000 towardbuyers closing costs and prepaid items, etc.

Okay, back to you and the Millers. You need to reviewthese offers with them and determine the best choice. Youllbe considering sales price, sales contingencies, settlement

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dates, and buyer quality. Suppose youve got two similar of-fers, each with an accompanying letter of mortgage loanstatus. One says that Buyer A is pre-qualified. One says thatBuyer B is pre-approved. Which one is better and how canyou tell?

If every loan officer worked the way I wish they did, theyshould be able to glance at these two letters and say, Ah ha!Buyer B has a pre-approval letter and must be the best. Pre-approved is better than pre-qualified, right? Let me give yousome insight from the lending side of the fence that will openyour eyes to the wishy-washy world of mortgage.

PRE-QUALIFICATION LETTERS

A pre-qualification letter implies many different degrees ofthoroughness in regards to determining a buyers borrowingability. It may indicate that a credit report has been pulledand reviewed, but no other information has been verified.The loan officer simply used verbal information provided bythe buyer, almost always over the phone. This is very com-mon. Or the pre-qualification letter may be the result of afive-minute conversation with a loan officer that went some-thing like this:

Loan Officer: Mr. Buyer, can you tell me about yourcredit history?

Potential Buyer: No problems that I know of.Loan Officer: Great. Are you employed?Potential Buyer: Yes.

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Loan Officer: And how much do you make per hour?Potential Buyer: I make $19.00 per hour.Loan Officer:Wonderful. And how about regular monthly

payments?Potential Buyer: Well, I have a car payment of $125 per

month and thats about it.Loan Officer: Do you have any money youd like to use

as down payment?Potential Buyer: No. Im interested in 100% financing,

like it says in your ad here in the phone book. Is thisgoing to take long? Ive got to meet my Realtor in 30minutes to make an offer on a house and she said thatyou should email her my letter that I need to go withthis offer. By the way, whats your interest rate?

Loan Officer: Well that depends on the loan program.Our state housing agency program is currently at6.09%.

Potential Buyer: Okay, that sounds pretty good. Myneighbor just bought a house and they said their ratewas higher than that.

Loan Officer: What is the sales price on the home youare looking at?

Potential Buyer: $160,000.Loan Officer: Okay then, that looks like it should be no

problem. Ill send your letter over right now and letsmake an appointment for you to come in the next fewdays.

That interview was full of so many holes from a practicalstandpoint that I dont even know where to begin. Then

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theres the issue of federal regulations that were violated. Butlets stick to the stuff that affects you and the Millers. Thisconversation could very well be the basis of a pre-qualifica-tion letter you are looking at. Its not until much later whenMr. Buyer comes in for his loan appointment that the loanofficer finds out that Mr. Buyer has two unpaid judgmentsand four collection accounts, none of which Mr. Buyer hadknowledge of. He also discovers that Mr. Buyer does make$19.00 per hour at his jobthe job he just started last weekafter being unemployed for the last eight months and atwhich he works only 20 hours per week. It also slipped Mr.Buyers mind that he is obligated to pay alimony and childsupport in the amount of $650 per month (this was basedoff of his previous employment nine months ago).

Trust me that when you do the math on Mr. Buyer, hecant qualify for the $160,000 home your are trying to sell.So you have a pre-qualification letter that never should havebeen written in the first place and is now wasting both yourand your clients time because of its lack of appropriate veri-fication of the borrowers financial status.

Some letters of pre-qualification may be the result of amore comprehensive phone application process and repre-sent a truly creditworthy buyer. Its usually very difficult totell the good from the bad.

Now lets explore the pre-approval letter and all that it issupposed to represent.

PRE-APPROVAL LETTERS

It is generally accepted that a pre-approval letter should be aletter issued to a buyer based on a full review of the clients

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credit, income, and asset status. Hopefully, it also means thatthe applicant was processed through an automated under-writing system such as Fannie Maes Desktop Underwriter.In that case, the loan officer would have taken a full mort-gage application and have a well-documented file full of paystubs, bank statements, proof of identity, signed disclosures,a good faith estimate, truth in lending documents, and acredit report. In short, the loan officer can offer a high levelof certainty that the borrower is worthy and that the bor-rower is well informed of the financial requirements to closethis loan and make the monthly payments.

Now let me introduce you to the root of all your prob-lems in this area: the loan officer. I know that the loan officeris the problem child because I hear about other loan officersfrom Realtors all the time. I also know that its the loan offi-cer issuing the letters that you are trying to decipher rightnow with the Millers and there are no hard and fast rulesregarding these letters that we (loan officers) have to follow.What should you do?

First, understand that a perfectly thorough loan officermay have issued the pre-qualification letter you have forBuyer A. This particular loan officer just prefers the termpre-qualified and doesnt get caught up in the terminology.She just focuses on doing a good job on her mortgage appli-cations and serving her clients to the best of her ability.Thats dandy.

Second, the pre-approval letter you have for Buyer B maynot be worth the paper its written on because, unlike ouraforementioned loan officer lady, Buyer Bs loan officer hada five-minute conversation not unlike the one previously pre-

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sented, and likes to use the term pre-approved loosely. Veryloosely.

Unless you have the good fortune of personally knowingthe loan officers issuing both of the letters and have greatconfidence in either mortgage professional, your next step isto read each letter carefully for answers to these questions:

1. Does the letter state the actual sales price of the homethe buyer is approved to purchase? (If they offered$200,000 but are only approved to $190,000, theresa problem.)

2. Does it state that the buyers credit status, income,and assets have been verified? (Buyers doing stated-income and/or stated-asset loans wouldnt need in-come or asset verification, but you wont know thisjust from the letter.)

3. Does it indicate if the buyer has been approvedthrough an automated underwriting system?

If you can answer yes to all of these questions, Id sayyou have a letter written by a competent, detail-oriented loanofficer. But more importantly, the buyer represented in thatletter is probably a solid borrower. If these questions arentanswered, call the loan officer for more details. Due to pri-vacy laws and confidentiality issues, a loan officer will notgive you any specifics, but they could answer the above ques-tions and help shed some light on the strength of the offeryour clients are considering.

Letters of pre-approval are never ironclad guarantees.This can be nerve-wracking sometimes because you dont

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want to accept the wrong offer and let the strong borrowerget away, only to go back to that strong borrower later andbe told, Sorry. Weve found another home.

Hopefully this little tutorial doesnt have you runningto sign up for bank teller training school as youve decidedthat you dont want to continue hacking your way throughthe jungle of real estate anymore. Just like Realtors, mort-gage professionals come in varying degrees of expertise andcompetency and, typically, you dont get to choose the lend-ers who affect your paycheck each month. (Im not makingyou feel any better, am I?) Let me just say, go forth, RealtorExtraordinaire. Go forth with this knowledge to guide yourclients through this real estate reality and be the agent theylove. Youll be fine.

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C H A P T E R 4

Dates, Deadlines, and Details

Logistics is the planning and implementation of the details ofan operation. In the real estate world, this means who doeswhat when. From response times at the beginning of theoffer process to loan application, inspection, appraisal, andloan denial deadlines during the transaction, you have a lotto keep track of when a contract gets written, considered,and accepted. When it comes down to the wire, youve gotsettlement, funding, recording, and, most important, posses-sion to worry about. The smoothest transaction in the worldcan end in anger and confusion when logistics are not con-sidered. Sometimes a transaction never gets off the groundbecause of poor logistical planning.

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D AT E S , D E A D L I N E S , A N D D E TA I L S

The three primary reasons you, as the buyers agent, maybe the target of this anger and confusion are:

1. The buyers offer has been rejected.

2. The buyer loses his or her earnest money.

3. The buyer is not able to move in when expected.

While contracts vary and special provisions can be writ-ten in for nonrefundable earnest money, some of the dead-lines well be discussing provide an out for buyers. Thisout allows them to cancel the contract and leave the transac-tion with their earnest money in hand. Violate a deadline,however, and the seller may get to keep your earnest money.

Every states purchase contract is different, so I wonteven attempt to dissect a certain states form. I will insteadgo through some common deadlines and take a look at howyou can avoid problems as you go. When questions or dis-crepancies arise, always consult with your broker and/orlegal counsel.

Also, keep in mind that this book is written from the per-spective of a loan officer, so my major concerns are to pro-vide you with a look from my side of the fence. This is basedon my own experiences and those of people Ive interviewed,usually with mortgage, title, and client service lessons inmind. While I think youll find this information very helpful,there most likely will be a whole other set of details you haveto consider on every contract that have to do with the inter-nal processes of your own office: updating MLS listings, get-ting contracts to transaction coordinators, sending escrowinstructions, etc. Make sure you understand this internal sys-tem as well to keep all parties in the loop and on course.

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OFFER/COUNTEROFFER/ADDENDUMRESPONSE TIMES

I had an agent tell a client once that the response times onthe contract were really more of a guideline, not a true hard-and-fast rule. Those of you out there whove experienced ahot, fast-moving market are shaking your heads right now.You can tell stories of listings youve had with multiple offerswhere it was all about response deadlines. Many of you haveprobably had a least one listing where the buyer to whomyou made a counteroffer missed out because of an agent whodidnt move quickly enough.

The other side of the coin is a sharp buyers agent who isfully aware of the impending deadline, but has a buyer whoeither cant be reached or just doesnt get the urgency of thesituation. Sometimes buyers can be reached by phone andwant to accept the counter, but arent available for signaturewithin the deadline. Thats where your reputation with yourcolleagues and knowledge of the standard practices in yourarea will determine the outcome. Verbal acceptances withpromises of signatures coming can be tricky business.

LOAN APPLICATION DEADLINE

Hopefully, you are representing a buyer who is fully pre-approved and this is not a worry. The offer you are writingwill always be stronger with a pre-approval letter attached.If pre-approval hasnt happened yet, be sure to discuss theimportance of moving quickly. Ive had many agents requestthe name of the clients preferred lender while they were

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writing the contract so that they could call and make theapplication appointment right then. If the preferred loan of-ficer is out of town and wont be available for ten days, itsnice to know. A decision needs to be made on whether to trypushing out the deadline (not a great idea) or looking for analternative lender.

INSPECTIONS DEADLINE

Coordinating home, termite, and septic inspections can bequite the juggling act. Throw in a water test, if necessary, andthings become even more complicated. The property, localrequirements, buyers preferences, and lender requirementswill dictate what the word inspection means. This is justanother example of how knowing your area and coordinat-ing with a lender early can be central to a smooth transac-tion. Youve got to figure out what inspections your clientwants or needs and how long they will take to complete.

Home Inspections

While a professional home inspection is always advisable, aclient may choose not to have one, or may want to do theirown inspection. If they want a professional report, hopefullyyou are familiar with the availability of inspectors in yourarea and a general turnaround time.

Termite Inspections

Do we need/want one or not? In some areas termite inspec-tions are an unwritten rule on any property because termites

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are a common problem. If a professional home inspection isdone, the termite inspection is usually already part of theservice. Many times your loan type dictates what is required.

Utah is a great example of the term it depends when itcomes to termite inspections in conjunction with loan re-quirements. While we have termites in Utah, they are not acommon problem and termite inspections are not automati-cally requested by a buyer. Typically, if a buyer is doing aconventional loan on a property, a termite inspection is notneeded. The exception may come when an appraiser notes inthe appraisal that there were signs of infestation. (Thiswould be a rare fluke because appraisers are not going intoa home looking for termites; its not their job. But if theysee something obvious, they are supposed to note it in theappraisal. Then the reviewing underwriter will want thehome inspected and treated if necessary.)

One other exception would be when an underwriter re-views an appraisal and notices in the pictures of the homethat there is direct wood-to-ground contact. Many seasonedunderwriters will ask for a termite inspection in this instance.

Veterans Affairs (VA) loans and Federal Housing Admin-istration (FHA) loans have completely opposite require-ments. This is a new twist for lenders in Utah because VAand FHA have always been very similar in their propertystandards. FHA recently dropped its termite inspection re-quirement for Utah. Last year we had to have them; this yearwe dont. Again, unless an appraiser notes a problem or anunderwriter requires one, termite inspections are no longerpart of the FHA loan process. VA loans, on the other hand,still require a termite inspection.

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So, my advice on termite inspections is to know your areaand/or call your buyers lender to be sure.

Septic Inspections

For some of you who always deal with properties on publicsewer systems, this will be a great bit of info for the propertythats somewhere in your professional future and has a septictank.

Some counties require septic inspections anytime a homeis sold. These are usually conducted by a local municipal au-thority. They will be looking at: (1) flow (are the toiletsflushing and the drains draining); (2) any signs of improperleach field function (standing water/sewage in the yard); and(3) whether the tank has been pumped in the last five years.If not, that will have to be done.

FHA loans require a septic inspection only if there aresigns of system failure or if an underwriter or local authorityrequires it. VA wants a septic inspection if there are knownsoil percolation problems, or the local authority or under-writer requires it. Conventional loans are dependent uponthe individual underwriter, but they are usually required.

If the septic tank needs to be pumped, a whole differentset of considerations enters the picture. This is great dinnerconversation and warrants taking some extra time for a fewfun-filled facts. First of all, it is rare that a homeowner re-members or even knows that it is advisable to have a septictank pumped every five years, especially if the septic systemis older. Newer tanks are much more efficient but wont beexempt from pumping if it is a loan or municipality require-

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ment. The party really starts when the homeowner realizesthat in order to get the tank pumped, they have to locate thetank, and, more specifically, the opening to the tank. Nineout of ten owners dont even know where their tank is ontheir property. Sometimes you can go to the county and thesystem will be on record with a plot plan of the tank so youcan locate it. Many times Ive had sellers out digging up halftheir backyard trying to find the septic tank. This gets espe-cially interesting in some regions in January when the groundis frozen.

Now for the really good news: Technology has left nocorner of the professional world untouched. It has evenfound its way into the septic system business. I discoveredthis last year when I had a buyer for whom I was doing aloan, and who was also selling a property without the assis-tance of a Realtor. My client was notified by his buyer thattheir loan required a septic inspection and since they hadlived there ten years and never pumped the tank, a tankpump as well. My client called me to (a) confirm that thiswas a normal lending requirement, and (b) lament loudlyabout the fact that they had no idea who to call for service,what it was going to cost them, or where the tank was lo-cated.

It just so happened that I was familiar with a septic ser-vice company in his area but couldnt remember what theycharged. For whatever reason, my client felt too over-whelmed to make a phone call and asked me to please callthem and find out the cost and call him back. Hey, customerservice, right? So I make the call and during the conversationwas informed that they offered a tank locating service as

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well. For a mere $60 they would drop a ball in the toilet thatgives off a radio signal. They would then flush the toilet andfollow the signal out to the backyard until it stopped. Tanklocated. But heres the best part. They offer a $20 rebate ifyoull retrieve the ball and return it to them. Is that a deal orwhat!?

Water Tests

A water test could be required on a private water system (awell) for many reasons. Some jurisdictions require it. Yourbuyer may want it or it may be customary to the area.

An FHA loan requires it only under certain conditions,i.e., mining or heavy agriculture within a quarter of a mile,underwriter discretion, etc. VA will want it no matter what.Conventional loans may want it at the underwriters discre-tion and most underwriters will want one. Lack of potablewater means major problems with marketability and value.

APPRAISAL DEADLINE

Okay, so now you have all your inspections figured out andhave come up with a reasonable deadline date. Now its timeto worry about the appraisal deadline. Time frames canreally vary from area to area. Many areas are saturated withappraisers and turnaround times are within a week. Otherareas, either because of lack of appraisers or an especiallybusy market, are dealing with a three-week minimum wait

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for an appraisal. In rural areas, long waits are especiallycommon.

Wait times can also be lender specific. You would thinkthat since the lender orders the appraisal, they would just usewhatever appraiser is fastest. Most lenders will only workwith certain appraisers that are on their approved list or oneswith whom they have ongoing relationships. If those ap-praisers are swamped, everybody waits. Knowing generaltimetables for your area will help, but its always better tocheck with the lender if you can. One other note is that withVA loans, the lender doesnt get to choose the appraiser. TheVA automated appraisal system assigns the appraiser to theproperty. While VA has recommended turnaround times fortheir VA-approved appraisers, there are no guarantees.

LOAN DENIAL DEADLINE

To be practical, this date should be far enough after the ap-praisal deadline to allow for what we call final underwriting.A loan cant have a final approval without the appraisal, sothe lender cant go forward with this step until the appraisalis available. How long for final underwriting? That, too, candepend from lender to lender. For some its three days; forothers it will be two weeks. If you havent researched thiswith the buyers specific lender, you may be creating a dead-line that cant be met. This would, therefore, put your buyerat a higher risk for losing their earnest money if somethinggoes wrong.

I can argue for two different approaches to loan denial

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deadlines. From the sellers perspective, dragging out a loandenial date means that a buyer can tie up the property for alonger period of time, have their financing denied, and stillget their earnest money back. While a sellers property isnttaken off of the market, the status of under contract tendsto scare off any other interested parties. Not getting to keepthe earnest money is sort of like adding insult to injury if ev-erything falls apart at the end. While no amount of earnestmoney is going to make up for a lost sale, at least its some-thing. As a sellers agent you may want to lobby for as short adeadline as possible when reviewing an offer with your client.

Buyers, on the other hand, always have the possibility oflast-minute loan denial due to completely unforeseen circum-stances. Ive had buyers scheduled for settlement on a Mon-day who got laid off from their jobs on the previous Fridayafternoon. It doesnt seem fair to take their earnest moneywhen theyve just suffered such a financial blow. To protectthem from losing their earnest money, a loan denial date asclose to the settlement date as possible is the way to go. Thenthe question becomes, will the seller accept it?

SETTLEMENT DATE

This is the day when buyer and seller sign documents. Mostof us call this closing, but we are usually wrong. Closingisnt until the loan has actually been funded by the lender(and the title/escrow company has the funds) and then re-corded at the county recorders office. At that point, thetransaction is actually closed.

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Figuring out the best settlement date for your buyermeans you have to work backward. You first have to ask thequestion, Exactly when do you want to take possession?You have to start with the day (and time of day) your clientwants to take possession and work backward from there.This is absolutely critical for the buyer who is selling a homesimultaneously and trying to orchestrate a smooth movefrom one house to the other. Get this one wrong and you canhave a buyer sitting curbside in front of their new home in aU-haul they cant unload and is supposed to be returned tothe rental place in four hours. Not to mention the fact theyhave nowhere to sleep that night.

First you consider any number of days or hours that theseller has requested to retain possession after closing. Exam-ple: In a counteroffer, the seller wants to relinquish posses-sion 48 hours after recording. Now calculate the time it takesto record. Some escrow companies have the ability to recordelectronically, so recording can happen within minutes of re-ceiving funds. Most escrow companies still have to physi-cally take the documents to the recorders office. Dependingon how they schedule their personnel, this can mean the dif-ference between a 4:58 p.m. recording on Thursday after-noon and a 10:00 a.m. recording on Friday morning. Thatmeans instead of moving into the home on Saturday eveningat 5:00 p.m., they have to wait until 10:00 a.m. on Sundaymorning, if the seller is not flexible.

Funding can really foul up a closingthanks, again, toyour local flaky lender. Every lender handles their fundingdifferently. You have to hope that whoever is in charge ofdoing this funding has shown up to work today, and if she

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hasnt, you have to hope that someone is supposed to be abackup. I had a funding once that took three days to materi-alize. I was a loan officer in a brokerage so I was dependentupon the funding department of the lender to whom the loanwas brokered. (This was many years ago, and I have sincemoved on to be with a mortgage banker that controls ourfundings in-house.) The point here is you need to talk to thelender, get a time frame, and then pray that it happens.

Funding, recording, and possession practices vary fromstate to state. Some states expect table fundings. In otherwords, the loan money beats the client to the settlementtable. When loans are table funded, buyers can get the keysto their home that same day. In Utah, loans are typicallyfunded and recorded the next business day after settlement.Buyers get their keys then or at the agreed-upon possessiondate after recording.

Take special care with out-of-state buyers. If theyvebought and sold a home before they often assume that every-thing works the same in every state. This is how you andyour clients can arrive at the anger and confusion point Imentioned at the beginning of this chapter. Again, whenwriting an offer, dont ask, What day do you want to settle/close? Instead ask, What day do you want to take posses-sion? and work from there.

Once a contract is accepted, be sure that you or your stafflog all of your contract deadlines and follow up on each one.A good loan officer will be doing the same. By calendaringthese items at the beginning, you can relax and work throughthe transaction, confident that you are representing yourbuyer brilliantly!

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C H A P T E R 5

Bankruptcy: Clear UpMisconceptions

Dont people have to wait seven years after a bankruptcy toget a mortgage approval? Dont I have to finish my paymentson my Chapter 13 before I apply for a home loan? I heardsub-prime lenders will give me a loan one day out of bank-ruptcy? Whats the real story here? Well, like everything elsein mortgage, we come back to the same answer: It depends.

I need to explain something about mortgages. A mort-gage is almost always created under guidelines that willmake it a saleable commodity. Who it is being sold to deter-mines what the guidelines are. The information Im sharing

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B A N K R U P T C Y : C L E A R U P M I S C O N C E P T I O N S

with you regarding bankruptcies is fairly standard practicethat I see across the board, especially with FHA and VAloans. FHA, VA, and state housing loan guidelines are clear.When you start looking at sub-prime and conventionalloans, you can really have some variance depending on theloan program and who the lender is eventually going to sellthe loan to. Do you see why my answer to many questions isalways, It depends?

In Chapter 1, I discussed how a bankruptcy can affect aseller. This chapter will give you some insight on how it af-fects borrowers. A little knowledge on this subject can reallyhelp with that common scenario Realtors so often find them-selves in: Saturday afternoon buyers who havent been pre-approved.

Whether you are sitting at an open house, or someonecalls on your listing, its very possible they will start throw-ing out life stories and loan questions. While you alwayswant to instruct them to seek out a competent lender, somebasic information may help you impress a potential new cli-ent. It may also save you from spending time with a clientwhos not quite ready for mortgage approval.

Again, a lender will have to make that final determina-tion, but theres no sense staying up until midnight writingan offer for a buyer whos still in the middle of a Chapter 7bankruptcy. Instead, take the opportunity to add these folksto your list of future prospects. An encouraging call everycouple of months will let them know you are committed tohelping them become homeowners. A good lender can guidethem to a point where they will be ready for that big day.

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How a bankruptcy affects a mortgage application de-pends on a number of things:

1. What type of bankruptcy is it? Chapter 7 or Chapter13?

2. When was it filed?

3. Has it been discharged? When?

4. Was it filed exclusively for relief from medical bills?

5. What type of loan is being sought? Sub-prime, con-ventional, FHA, VA, or state housing?

Lets start by saying that we are going to look at the rules forbuyers and not borrowers who are refinancing their home.The rules are pretty much the same for both, except withsub-prime loans. If a loan is super-low riski.e., low loan-to-value, borrower with stable income, etc.sub-primelenders can be more lenient on a refinance transaction. Withthe upheaval of the sub-prime market at the beginning of thisyear, theyve tightened up a lot. When it comes to purchaseloans, theyve tightened up their requirements so much thattheir rules are almost the same as all other types of lending.So why put a buyer in a higher interest rate, sub-prime loanwhen they can qualify for a conventional, FHA, VA, or statehousing loan?

Sub-prime, FHA, VA, or state housing loans will usuallyfollow the same general guidelines for each type of bank-ruptcy.

Chapter 7: The bankruptcy must be discharged (notfiled) a minimum of two years ago. If the bankruptcy was

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filed exclusively for the relief of medical bills, then the timelimit is a minimum of one year from discharge.

Chapter 13: A borrower must have made at least 12on-time payments to the Trustee. The bankruptcy does nothave to be discharged.

A conventional loan is a blanket term that could cover acommunity homebuyer program that has less stringent creditrequirements, as well as a niche loan such as stated income.The loan type and risk level will determine whether thebankruptcy rules are the same as above or more stringent.On a higher risk loan you could easily have a no-bankrupt-cies-filed-or-discharged-within-the-last-four-years rule. Soonce again, my standard answerit dependsreally applies.

I have worked with many clients over the years withbankruptcies in their credit history. Many who just barelycleared the wait period requirement, but still qualified for100% financing under a VA, Community Home Buyer, orstate housing loan. Ive also denied many loans for borrow-ers with previous bankruptcies. Many denials were given toborrowers who were four years or more past their dischargedate. What are the differences between the two groups ofborrowers?

Re-established Credit. Borrowers who have had abankruptcy must prove themselves creditworthy again.Many times they did not include a car loan in the bankruptcyand have continued to make on-time payments. Sometimestheyve opened a credit card account, even if they had to do

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it by securing the card with savings. These two methods arethe most common ways borrowers keep good credit report-ing to the credit bureaus, thereby raising their credit scoreover the two-year period since the bankruptcy. They alsohave taken care to pay all other obligations on time to avoidhaving any new collection accounts or judgments.

Reserves. This is what lenders call money in the bank.We also consider retirement and investment accounts in thereserve tally. Lets say that a borrower is trying to qualify fora home and the total house payment is $1200. If they have$1200 in savings, we then view that as one months re-serve; $2400 would be two months, and so on. Reservescan always be the difference between an approved or deniedstatus. Because lenders use automated underwriting softwarewe can not only enter in a clients current application infor-mation, we can enter future information as well. I may get adenied or refer decision on an applicant who has no re-serves. I can then re-enter the amount of money he hopes tosave over the next 90 days. One month reserve may changethat underwriting decision to approved, and now my cli-ent knows his clear-cut path to his goal of an approved loan.

One more quick comment: Did you know that if a client hasused a credit counseling service and it reflects on their creditreport, that fact must be treated with the same rules as aChapter 13 bankruptcy?

While Chapter 7 bankruptcy filing rules have drasticallychanged in recent years, which will probably result in fewer

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future bankruptcies, there is a current buyer pool with an all-

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