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What to look for in a final walk-through inspection

by Patti Lyles
Property should be in same condition as day you signed contract

Wednesday, October 24, 2007

Most home buyers will have at least two opportunities to inspect their property before closing on the purchase.

First, most buyers will include a contingency in the contract that allows them to do a professional home inspection by the home inspector of their choice. This inspection typically happens right after the sales price has been agreed to, usually within a week or 10 days.

If the home inspector finds anything wrong in the property or decides further inspections (perhaps for radon, heating and air conditioning systems, or mold) are called for, the home buyer will be able to hire specialists to figure out if there is an insurmountable physical problem with the property.

Assuming those inspections go well, the second opportunity to inspect the property is just before the property closes. The preclosing inspection, or final walk-through, as it is often referred to, is a home buyer's last opportunity to walk through the property before closing.

What you're looking for here is not at the same level as the initial professional home inspection. In a preclosing inspection, you simply want to make sure that the property is in the same condition as it was on the day you agreed to buy it.

To avoid getting burned, you schedule the walk-through as close to the actual closing as possible, certainly within the 24 to 48 hours prior to closing. If possible, the sellers should have already moved out.

The whole point of the walk-through is to protect yourself and your future property from sellers who aren't as nice as they seem to be or who are actually as nasty as they appear. By inspecting the premises, you're making sure the seller has lived up to his or her agreements in the sales contract. And if he or she hasn't, you want to know about it in advance of the closing so remedies (both monetary and otherwise) can be agreed upon before money changes hands.

What should you look for in a preclosing inspection? To start with, you want to make sure that the condition of the home hasn't changed since you signed the contract several months earlier.

Believe it or not, a lot can change in the ensuing weeks. To make sure the home is in the same condition, you'll want to turn on every appliance, open every door, make sure nothing's broken (lights, fixtures, windows, etc.), be certain everything the seller agreed to leave is actually there and in good shape, and be certain that when the sellers moved out, they did no damage to the home.

Sometimes movers can accidentally scrape a wall or pull up carpet in the process of packing up the contents of a house. If you do your preclosing inspection while the movers are there, you'll have a harder time getting around them to make sure that the property is in good shape.

If you get there before the sellers have packed anything up, you might wind up with some nasty surprises on the day you move into the property.

I learned the hard way that sometimes sellers just don't want you to find out certain things until you've closed on the property.

Nearly 30 years ago, I bought our first place. It was a vintage co-op built in the 1920s. The sellers were seniors, and they were a bit quirky. The property hadn't been touched in years.

When I did our final walk-through, I noticed that the water was turned off in the kitchen sink. I wanted to run the dishwasher, which was really old, but didn't want to turn on the water if it was off.

Looking back, it's hard to imagine why this wasn't a red flag for me. But I was really happy to be buying my first place, which was taking just about all the money I had in the world. I didn't question it. I just bought it and moved in.

The first night I unpacked the dishes and decided to run a load in the dishwasher. At well past midnight, I turned on the water and I put in the dish soap and turned on the machine. I went to bed.

I was awakened early the next morning with pounding on our front door. My downstairs neighbors came into their kitchen and noticed that the liquid contents of my dishwasher had dripped down through the ceiling into their kitchen, ruining their window shade.

Iistantly knew why the water had been turned off. Too bad I didn't find that out ahead of time. Still, the damage could have been worse.

As I recall, it cost me $600 to fix the damage in our neighbor's apartment.

Hey homeowners loan modification is an idea

by Patti Lyles

Is your loan going to reset?

Part 1 of 2: Preparing for an adjustable-rate reset

Monday, October 22, 2007

by Patti Lyles

(This is Part 1 of a two-part series.)

A loan modification is a change in the loan contract agreed to by the lender and the borrower. The modifications of major concern today are those designed to reduce the payment burden on borrowers faced with impending rate increases that will make the mortgage payment unaffordable to them. Many are subprime borrowers.

Homeowners faced with this prospect, whether they are already delinquent or not, should request a modification. They are very unlikely to get one if they don't ask, and they should make the investment required to make their case. The stakes are very high: They can save their house and their credit.

The Decision Process: In most cases, the decision on a modification is not made by the firm that owns the loan. It is made by a firm servicing the loan under contract to the owner. The owner could be a single lender, or it could be a group of investors who own pieces of a mortgage-backed security collateralized by a pool of loans.

Whoever the owner, the servicing firm is contractually obligated to find the solution to payment problems that will minimize loss to the owner. If the lowest-cost solution is a contract modification, great -- everyone involved prefers a modification to a foreclosure. But if a foreclosure would generate lower costs for the owner, the decision will be to foreclose. The cost of foreclosure to the borrower does not enter the decision.

Yet the decision is far from cut and dried, and it can be materially affected by whether and how the borrower presents his case. On this issue, I have benefited from an exchange with Warren Brasch, an attorney who represents borrowers seeking loan modifications.

Equity: Perhaps the most important factor affecting the modification decision is the amount of equity the borrower has in his property. If the borrower has enough equity in the property to pay any deferred interest plus foreclosure expenses, foreclosure is almost bound to be the lower-cost solution.

Equity depends on property value, which the borrower is much better positioned to know than the servicer. The borrower knows or can easily find out how many houses in the neighborhood are for sale and what the trend has been in recent sale prices. In a weakening market, it is easy for the lender to overestimate value, and the borrower must prevent that.

Moral Hazard: Servicers fear that if they are liberal in granting modifications, borrowers who don't need a modification will seek one anyway. They protect themselves against this by entertaining modification proposals on a case-by-case basis, while placing the burden of proof on the borrower.

Borrowers must accept the burden of proof. In addition to the data on property value, they need to document that they cannot afford the payment increase that is pending, and they must document exactly what they can afford.

For this purpose, borrowers should calculate their total debt ratio: the sum of mortgage payment, other debt payments, property taxes and homeowners insurance as a percent of their gross (before-tax) income. This number should be calculated now, what it will be after the rate adjustment, and what they will be able to afford. On the last, Brasch suggests that a servicer may be willing to accept 45 percent as a reasonable maximum.

Servicing Cost: Servicers have a self-interest in minimizing modifications because they add to costs. They try to minimize costs by computerizing the servicing process to the maximum degree possible, and standardizing customer support procedures so that low-paid and easily trained employees can perform them.

Modifications must be handled by a special group who are more highly trained and better-paid, and the increased costs from expanding their number cuts into the bottom line. Hence, there is a tendency to be nonresponsive in the hope that the borrower will go away.

Borrowers have to be persistent. According to Brasch: "If a servicer says they will call you back … forget about it. You need to call them and call them constantly. They will lose your paperwork, fail to return calls, put you on hold, and then hang up. It's what they do. Keep fighting, calling, faxing. This does work!"

In making their decisions about whether a modification would be less costly than a foreclosure, servicers usually ignore an asset possessed by the borrower that could tilt the balance toward modification. This is the right to future appreciation in the value of the borrower's house. In exchange for a modification that might otherwise be more costly to the owner than a foreclosure, the borrower could pledge a percent of the future appreciation, which could shift the balance to modification. This will be discussed in the second article in this series.

An agent is not your surrogate

by Patti Lyles

A lesson in real estate problem-spotting

All too often, home buyers and sellers remove themselves as active participants in their real estate transaction when the contract is signed, confident that their agent will handle everything for them. This approach can result in an unpleasant surprise if your agent calls to tell you at the 11th hour that the sale has been delayed or won't be closing at all.

A Santa Cruz real estate agent should, of course, stay on top of the details. But an agent is not your surrogate. Ideally, you and your agent will work as a team to close the deal. However, remember that you are the decision maker, and your agent is merely the facilitator.

For example, let's say the people who have agreed to buy your home are having trouble lining up financing. They request a couple of extra days to finalize a loan commitment. The request will be made through your agent. It would be inappropriate for your agent to grant the extension. That's a decision for you, the seller to make, while relying on the good advice of your agent.

The delay in financing could be due to the fact that the lender hasn't received a forthcoming document. Or, it could be due to a bad credit report. The first is nothing to worry about; the second could mean big trouble.

Suppose your agent decides not to bother you with the request for an extension. Instead, your agent tells the buyers' agent that it's OK to take the extra time. The agent has now stepped in to the role of decision-maker.

A few days turns into a week and you still don't know that anything might be amiss with your sale. If the buyers aren't successful in obtaining the financing they need to close, you could have wasted precious marketing time by not staying involved.

Some agents think they're doing their clients a favor by insulating them from bad news. They hope to solve the problem so that the buyer or seller isn't bothered. Although the agent's intentions might be good, they are ill conceived.

HOUSE HUNTING TIP: To ensure that you have a successful home purchase or sale, resolve to stay involved in the process from beginning to end. This may seem impossible to buyers and sellers who are extremely busy. There's usually a lot at stake, so it's worthwhile to make time to stay involved in the outcome of your real estate transaction.

One reason buyers and sellers shrink into the woodwork as soon as the contract is signed is they feel they're out of their element. They have little or no real estate experience and think it's best to leave the heavy lifting to people who know what they're doing.

A good way to stay on top of your transaction -- regardless of your level of expertise -- is to ask your agent to provide you with a summary of the critical details of your purchase contract as soon as possible after the final contract is signed.

The summary should include key contract dates for such things as the date the buyer's deposit is due, contingency deadlines (for financing, inspections, the sale of another property, etc.), a final walk through of the property and the closing date.

It should also include the names and contact information of the people involved in the transactions, such as the buyers and sellers, their real estate agents, the closing agent, inspectors and the buyer's mortgage broker or loan agent. A synopsis of who pays for what (transfer taxes, mortgage fees, etc.) is also useful.

THE CLOSING: Enter the key contracts dates on your calendar and follow up with your agent on the critical deadlines as they come due.

Patti Lyles @www.SantaCruzRealEstateHomes.com

Q: What’s the difference between a stated income loan and a fully documented loan if I want to purchase a home or refinance my home loan?

 

A: To put it simply, a stated income loan is where you, as the borrower, are stating your income but not providing any proof of your income. The usual result is a higher rate for the loan because of the lack of documentation of your income. Under prime and Alternative A lending guidelines, a fully documented loan typically requires either the last 2 years of tax returns or W2s. With the Subprime fallout and the resulting impact on the lending industry, programs like stated income loans have recently come under greater scrutiny. Stated income and fully documented loans are just two types of programs, there are others available but for now we will just address these two loan programs.

 

Is this greater scrutiny on stated income loans fair? Like a lot of things in life, stated income loans programs were created with good intentions but morphed into something abused by the less scrupulous elements in the lending industry. Stated income loans were originally designed for the self-employed but they also filled niches for other borrowers on the fringe who were unable to provide full documentation of their income. But as the subprime market began to grow, other types of borrowers started using stated income loans to qualify for purchase and refinance loans. Within the lending industry,

Well stated income loans were referred to as “liar loans,” which I believe is self-explanatory and doesn’t require further explanation on what borrowers were doing on these loan applications.

 

During the most recent increase in the California housing market, many borrowers purchased homes with fairly exotic loan

programs like the 80/20 Interest Only Stated Income loan. Let’s break that down, this was a loan with 100% financing with zero down creating an 80% first and a 20% second and both loans were interest only payment loans with the borrower stating income. Well, guess what? It turns out this very popular loan program (and others similar to this one) was one (of many) culprits in the resulting Subprime fall out.

 

Recently, regulatory agencies have started examining certain loan programs like Interest Only loans, Stated Income loans, and Adjustable Rate Mortgage loans to see if they are in the best interest of the borrower. So what should you do if you are self-employed and want to buy a home or do a refinance?

Well, a lot of it will depend on you as an individual. To get the best rate possible, do the fully documented loan and submit the last 2 years of tax returns. If you aren’t concerned with rate and more concerned with convenience, then stated income loans might be your best bet but please be truthful

about your income on your loan application. But you should know, many lenders are now requesting a 4506T which gives the lender the ability to see what you declared as income on the last two years of tax returns. If the lender submits

and they are beginning to do so more often, the numbers on your loan application and the 4506T better match up.

 

One last note, I believe, and please remember this is only my opinion, the stated income loans may go the way of the dinosaur and be disappearing in the near future (or at least be so rare it will be difficult to get one through the

underwriting process). What is the evidence for this statement? Well, I do not have any evidence to present, it’s a just a theory based on the rumblings coming out of Capitol Hill, changes in lender underwriting guidelines and keeping an eye on the market here in Santa Cruz and the rest of California. But rest assured, lenders will continue to tighten their guidelines to create a sellable security on the secondary market.

 

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Contact Information

Photo of Patti Lyles Real Estate
Patti Lyles
Century 21 Showcase, REALTORS
P.O. Box 67275
Scotts Valley CA 95067
831-335-2100

DRE #01385517