Leave nothing to chance: Tips for smooth closings in 2017


Leave nothing to chance in 2017 on your real estate purchases 

South Florida’s unique challenges in real estate sales also offer unique opportunities to shine, make a nice profit and get ahead of potential problems. Having an excellent closing team on your side can also facilitate the journey and we aim to be just that to our clients ¬†– a resource and problem solving partner for you. Here a few tried and tested tips to make your deals stay on track in 2017:

  1. The CD is here to stay: Or is it? Well, for now we need to keep working with the Closing Disclosure. The good news is buyers know their final loan terms and cash to close three full days before closing and the days of  last minute, closing by ambush are long behind us.
  2. Make sure the title company orders a lien /code violation /open permit search during the inspection period : What is known as the “Lien search” is actually a code/¬†municipal /open permit search and is a must,¬†even on condos. Most REO closing agents did not¬†¬†conduct¬†lien searches. ¬†Those pesky violations can amount tens of thousands if left unchecked, ¬†and all lien searches are not created equal.
  3. Protect your escrow deposit: Sellers can and will claim deposits due to blown inspection deadlines or carelessly handled loan applications.
  4. Read the condominium /homeowner association documents and estoppel letter carefully: Make sure you read the condo docs and the condo estoppel letter . These documents contain important information regarding rules, maintenance fees, parking space numbers, number of associations and whether any special assessments are in place or being contemplated.
  5. FIRPTA (Foreign Investment in Real Property Tax Act ) rules changed in 2016:  As a general rule, the withholding rate for foreign nationals selling U.S. real estate  has increased to 15% unless certain exceptions apply. Plan ahead  for a smooth FIRPTA closing and if they plan 90 + days ahead, a seller can  apply for a  withholding certificate and possibly reduce the mandatory withholding amount prior to closing. Learn more at Does FIRPTA apply to my seller?
  6. Know your lender and what they are capable of:  Financing of single family homes and condominiums continues to present unique challenges to borrowers in South Florida. Work only with reputable, well established lender or mortgage brokers with a proven track record for both closing and turning away deals that cannot be done. Our blog post details a plan of action for borrowers.

Please contact us via email or at 305-271-0100 for more information or for a complimentary contract review.

Happy New Year to all our clients and we wish you a prosperous 2017!

Vice President, Licensed Title Agent and FRP Paralegal

Disclaimer: The Closing Company, Inc. is not a law firm and is not providing legal or tax advice.  For legal advice, please consult with a licensed Attorney. For tax advice, consult with a Certified Public Accountant. Hiring an attorney is an important decision which should not be based solely on advertising. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

What is the difference between a quit claim deed and a warranty deed?

Martyn Verster Esq Miami Florida

What is the difference between a Quit Claim Deed and Warranty Deed?

 by Martyn Verster, Esq. martyn@theclosingcompany.net

A quit-claim deed (QCD) is an instrument used by a grantor to relinquish the grantor’s interest in real estate in favor of a specified grantee.  The QCD is an instrument that does not come with any warranties of title, and should the grantor not possess title in the property attempting to be conveyed, or should there be a cloud on title, then the grantee acquires either nothing or grantee acquires the property subject to the cloud on title.  In any event, grantee will have no recourse against the grantor under the QCD.  For the reasons stated, the QCD is an instrument best used to deed oneself out of the title to property or as a curative instrument to clear a title defect, but not an instrument by which a grantee should acquire title to real property.

The proper instrument to convey title to real property is a warranty deed; this is the document that conveys grantor’s interest in the property in favor of a specified grantee, and the conveyance comes with warranty of title.  The conveyance of title by warranty deed is insurable, and grantee has full recourse against the grantor.  Moreover, if the grantor has an owner’s title insurance policy, the grantor will be insured against any future claim that grantor did not convey marketable title to the grantee.

Important limitations and problems with quit-claim deeds:  the conveyance by QCD is not insurable as part of a closing transaction.  Additionally, a grantor of property who conveys the property via QCD loses the benefit of any Owner’s Title insurance that the grantor may possess.  By way of example, if the grantor conveys real property to her son via a QCD, any prior liens, encumbrances and other clouds on title would no longer be insured.

Because of the foregoing, The Closing Company, Inc.  recommends that most conveyances be made by warranty deed.  The warranty deed is a more complex document to prepare correctly, and accordingly, TCC has all warranty deeds reviewed by our attorney, and an additional charge for attorney fees is made for the preparation of a warranty deed.

Please feel free to ask further questions to determine whether the conveyance of property by way of warranty deed is of added benefit to you as grantor and/or grantee. Please call us at 305-271-0100 or info@theclosingcompany.net

 Frequently asked questions and answers about Florida Quit Claim Deeds

¬†What is a Quit Claim Deed?¬†An instrument of conveyance commonly known as a ‚Äútitle transfer‚ÄĚ of real property that passes any title, claim, or interest that the grantor has in the premises but does¬†not¬†make any representations or guarantee the validity of such title.

Is a “Quit Claim Deed” different from a “Quick Claim Deed”?¬† A quick claim does not exists! It is a misnomer. ¬†Over the years,¬† people started identifying a quit claim deed ¬†as a “quick claim deed” ¬†most likely because it is actually a fast way to transfer title. ¬† Quick claim deed is not an actual word- but we understand how it ¬†began to be used!

Who will need to sign the Quit Claim Deed? The only person(s) that need to sign the Quit Claim Deed are the people getting off title. However, scenarios can vary.

Do the new owners receiving title need to sign the Quit Claim Deed? No, they do not. However, the new owners do need to be available to sign a Document Disclaimer for our records to acknowledge the document.

Will my property taxes go up? Possibly. We don’t make any representations about property taxes. Please consult the property tax appraiser in your county for more information prior to transferring title.

Does a Quit Claim Deed provide any guarantees or assurances? No, it does not. A title search will not be done. A Quit Claim Deed only says to the new owner that if the signer has any interest in the property being transferred, they pass their interest to the owner. Only a Warranty Deed or title insured transaction provides assurance of ownership.

What about any open mortgages on the property? We don’t research for any existing mortgages, since a Quit Claim Deed is being requested. The Borrower needs to contact their lending institution regarding open mortgages.

How will I know if the property has any liens, judgments, survey issues or other problems? You won’t know. We won’t be conducting a title search or providing title insurance to verify ownership and using only the information the person ordering the document is providing, you won’t know anything about the title condition or if any title defects exist.

How do I know if taxes are paid before I take title?  You need to check the tax records of the municipality before taking title if that is a concern. We do not verify taxes.

Do I need notify the Condominium Association or Homeowner Association about the transfer? Yes, you will need to contact them in advance and ask how this process works for the new owner. We do not provide assistance with this.

How will I know if any Condominium/Homeowner association  fees are past due before I take title? You will need to contact the Condo/HOA Association and request that information directly from them.

 Does the document need to be notarized? Yes, it will need to be notarized by U.S. Notary and witnessed by two people (one of the two witness can be the notary).  If you are outside of the USA, you will need to visit a USA embassy or consulate.

What are the tax implications of a Quit Claim Deed? Both the old and new owners need to consult with a tax advisor or CPA before taking title. We do not provide tax or legal advice on the execution of this document.

Please contact 305-271-0100 or info@theclosingcompany.net for more information.

Disclaimer: The Closing Company, Inc. is not a law firm and is not providing legal or tax advice in this post.   For legal advice, please consult with a licensed Attorney. For tax advice, consult with a Certified Public Accountant. Hiring an attorney is an important decision which should not be based solely on advertising. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship.

 

Our most liked blog posts of 2016

Most liked blog posts of 2016
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What every Miami Home Buyer Needs to know about purchasing real estate in South Florida 



What buyers to know about loans right now: Emphatic tips from a title agent



5 things every Florida condo buyer must do before closing



5 tips to structure your FIRPTA foreign national sale



Think carefully before rocking that 3 day CD boat 



Top 5 things buyers and investors should know for 2016


What exactly is a Florida Quit Claim Deed?

A quitclaim deed form is often used in Florida to transfer title to real estate in situations where the person transferring the property does not want to be liable for any warranties of title.  It is often used among family members, married couples divorcing or among related persons or business entities.

With a quitclaim deed, the transferor is not guaranteeing that he or she owns the property.  The quitclaim deed only transfers whatever interest the owner happens to have. The primary difference between a Florida quitclaim deed form and a Florida warranty deed form is the language used to transfer title.

The language of conveyance for a Florida warranty deed will usually follow the statutory language by providing that the transferor is ‚Äúgranted, bargained and sold‚ÄĚ the property to the transferee.

A quitclaim deed, by contrast, will usually use language that does not warrant title.

These seemingly minor differences in language can have significant consequences for both the transferor and the transferee.  Like legal descriptions, the warranty language included in the deed must be exact.  And, as with all deeds, it is important to draft the deed to meet Florida recording requirements.  Failure to meet recording requirements could cause the document to be rejected or result in additional recording fees as a non-compliant document. In addition, defective quit claim deeds can cause title defects when not properly prepared.

We can prepare an attorney-prepared Quit Claim Deed for a cost of $350 with a 2-3 business day turnaround time.  Download Order Form and email to info@theclosingcompany.net Please call 305-271-0100 with any questions.

Quit Claim Deed –¬†Frequently asked questions and answers

What is a Quit Claim Deed? An instrument of conveyance commonly known as a ‚Äútitle transfer‚ÄĚ of real property that passes any title, claim, or interest that the grantor has in the premises but does not make any representations as to the validity of such title.

Who will need to sign the Quit Claim Deed? The only person(s) that need to sign the Quit Claim Deed are the people GIVING title or the current owners. Whoever you specify as being the current title holder are the only parties that are required to sign.

Do the new owners receiving title need to sign the Quit Claim Deed? No, they do not. However,the new owners do need to be available to sign a Document Disclaimer for our records to acknowledge the document.

Will my property taxes go up? We don’t make any representations about property taxes. Please consult the property tax appraiser in your county for more information prior to transferring title .

Does a Quit Claim Deed provide any guarantees or assurances? No, it does not. A title search will not be done. A Quit Claim Deed only says to the new owner that if the signer has any interest in the property being transferred, they pass their interest to the owner. Only a Warranty Deed or title insured transaction provides assurance of ownership.

What about any open mortgages on the property? We don’t research for any existing mortgages, since a Quit Claim Deed is being requested. The Borrower needs to contact their lending institution regarding open mortgages.

How will I know if the property has any liens, judgments, survey issues or other problems? You won’t know. Since we won’t be conducting a title search or providing title insurance to verify ownership and using only the information the person ordering the document is providing, you won’t know anything about the title condition or if any title defects exist.

How do I know if taxes are paid before I take title?  You need to check the tax records of the municipality before taking title if that is a concern. We do not verify taxes.

Do I need notify the Condominium Association or Homeowner Association about the transfer? Yes, you will need to contact them in advance and ask how this process works for the new owner. We do not provide assistance with this.

How will I know if any Condo/HOA fees are past due before I take title? You will need to contact the Condo/HOA Association and request that information directly from them.

Does the document need to be notarized? Yes, it will need to be notarized by U.S. Notary and witnessed by two people (one of the two witness can be the notary). Foreign notaries are not accepted.

What are the tax implications of a Quit Claim Deed? Both the old and new owners need to consult with a tax advisor or CPA before taking title. We do not provide tax or legal advice on the execution of this document.

Questions? Please contact us at 305-271-0100 or info@theclosingcompany.net for more information

Buyers and sellers need to be extremely cautious with all wire instructions

Due to the high incidence of hacking into title companies system,  buyers and sellers needs to use great caution during their transaction . The following tips will help prevent wire fraud and make sure the proceeds to/from a sale go to the correct party, not some offshore hacker:

Sellers:

  • do not email/fax your wire instructions to anyone
  • do provide the title company or attorney handling your transaction original signed wire instructions
  • Insist that the title company/attorney recite back to you before disbursing the funds the wire instructions they have on record for you

Buyers:

  • before wiring your cash to close to the title company, call them direct and verify their wire instructions

These proactive steps by buyers/sellers  will help protect their funds from criminals.

Don’t assume best practices are being followed and be proactive toward your own financial security.

Any questions, please call us at 305-271-0100 or info@theclosingcompany.net

sellers beware of wire instructions

 

 

 

 

 

What every Florida home buyer must know

Dead deals. Declined loans. Defective title. Open permits. No insurance available. Code violations for $13,000?  These are just a few of the deal killers plaguing our market. Here are some things Miami home buyers needs to know right now about buying real estate:

1. Make sure to have your title company order a code violation /open permit /municipal lien search: This search is known in the title industry as simply the “lien search”: ¬†As formerly bank owned properties are now becoming re-sales by investors, ¬†these same investors are now discovering that many title companies that represented REOs did not conduct¬†full lien searches at the Municipal level. ¬†Pesky violations can amount to thousands of dollars and can be very difficult to resolve.¬† Make sure your title company is ordering a full lien search¬†within the inspection period.

2. If you are buying a condo and plan to put less than 25% down payment: You will most likely not get a loan. Only an estimated 15 condo buildings in Miami-Dade County are currently approved for FHA financing.  Inquire in advance with your lender before even making an offer if the condominium building will qualify for financing. A qualified loan professional will ask you to get the financial documents before even considering an application. Note : A high ratio of renters to owner-occupied units can make financing unlikely. Search for approved condos at FHA approved condo search

3. Read the Condo or HOA Estoppel Letter yourself and read it carefully: Your buyer should not rely solely on others to read the condo estoppel letter  In addition to the regular maintenance fees, it will contain important information on special assessments, parking information,  additional maintenance fees and unit violations that may have not been on the contract or condo disclosure.

4. Do not apply for your loan through a toll free number or at your local bank branch: Neither approach will likely to get your loan closed. These guys are ‚Äúorder takers‚ÄĚ not mortgage /home loan professionals. No matter how good your relationship is with your bank or how much money you have deposited there, it will not make any difference during the loan process. Neither will using your current lender. Your excellent track record of on-time payments is only a statistic to them, same as if it was with an outside bank. New loan applications are¬† treated as if they walked in off the street! The only exceptions may be in private banking, for high net worth individuals.

5. Be wary of online-based lenders such as Quicken loans, Rocket Mortgage etc.: Though they are legit, licensed lenders, South Florida is a unique lending market fraught with hurdles for borrowers. They may deny your loan ¬†a few days before closing and many times they will cut off all communication with you right after denying your loan. We call this the “Lender AWOL” of which we have seen dozens of in 2016. ¬†This will jeopardize your deposit, waste money on upfront costs and put your deal into a tail spin.

6. Obtain a Good Faith Estimate of Costs from your lender: Request a loan estimate from a minimum of 1-2 mortgage professionals recommended by a friend, family member or real estate professional who did a closing with them within the last year: Ask them what rate they received and what their closing costs were, to have a point of reference going into the conversation. Often, the most demanding, exacting, tough talking loan officers are the only ones who  can close. See sample Closing Costs Estimate. 

6. If you are self-employed in any way (Sole Proprietor, a 1099 contractor, own a company but issue W2):  You will likely need a mortgage broker, not a conventional bank.   Setting up and vetting a self employed borrower for underwriting in this situation is trickier than a W-2 employee , but someone with experience will know how to get it done.

7. The new consumer finance laws really benefit borrowers:¬†All lenders must provide borrowers a¬†Closing Disclosure¬†itemizing all loan fees ¬†before proceeding with a loan application. Any changes to these fees along the way, require a a revised disclosure thus assuring a ‚Äúno surprise‚ÄĚ closing . Insist on written estimates and let them know you are aware of these changes.

8. Be aware of what property issues may cause loan or  insurance problems: Property related issues such as  a low appraisal, termites, flat roofs, older roofs,  outdated electrical wiring, rotting wood, illegal additions, lack of storm shutters can cause insurance or lending issues.

9. The best interest rates go to borrowers who do their homework and understand their situation and risk level for a bank: Know your credit score and have your W2, bank statements and tax returns ready. If self-employed, know your rate and closing costs will be a bit higher as you will be perceived as a higher risk.

10. Read those ultra-boring condominium documents:¬†‚ÄúMust reads‚ÄĚ include the Articles of Incorporation, Declaration of Condominium, Bylaws, Amendments, FAQ and the Budget. ¬†Though these documents are lengthy, they outline the rules and procedures the buyer will abide by when purchasing a unit e.g. leasing the unit, running an AirBNB, trash policies or displaying your favorite country‚Äôs flag on your balcony. See¬†sample condominium documents

11. For a condo purchase, make sure your closing documents include an ‚ÄúAssignment of Parking Space‚ÄĚ :¬†This states by the seller what parking and/or storage spaces are being assigned. See¬†sample assignment of parking space.

With the support of the listing, selling agent and the title company/attorney, buyers can be provided the best available information for their decision making process.

For a complimentary contract review or a title services quote please call 305-271-0100 or info@thclosingcompany.net

Disclaimer: The Closing Company, Inc. is not a law firm and is not providing legal or tax advice in this post.  For legal advice, please consult with a licensed Attorney. For tax advice, consult with a Certified Public Accountant. Hiring an attorney is an important decision which should not be based solely on advertising. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

 

What exactly does a title insurance company do for you?

What exactly does a title company do for you?

The title insurance company handles the settlement, title examination and escrow (money part) in a real estate transaction. acts as the center point for a real estate closing for the buyers, sellers, attorneys, new and current lenders, realtors, insurance company, condominium/HOA association, surveyor and insurance company. Finally, buyers and sellers customarily physically gather at the title company’s office to sign and notarize all their documents and finalize the sale.  At this time buyers pay their final cash to close and receive their keys while sellers receive their seller proceeds from their sale.

Here are some of the high level, licensed professional services that a title company performs:

  • Order title search
  • Title examination by Attorney or Licensed Title Agent
  • Prepare title insurance commitment and comply with all requirements
  • Tax search
  • Order mortgage payoffs for open mortgages and all liens
  • Request Homeowner/Condominium Association payoff letters for maintenance fees
  • Inquiry Homeowner/Condominium Association for special assessment and litigation information
  • Check for municipal liens, code violations and open permits (i.e. City of Coral Gables or City of Miami Beach, Florida)
  • Coordinate the loan closing and title insurance for the new lender
  • Prepare all legal documents, e.g. loan documents, affidavits, power of attorney, bill of sale, deeds, corporation resolutions and/or FIRPTA documentation
  • Prepare the Closing Disclosure (“CD”) or “HUD” (this closing statement form now used only for cash transactions)
  • Pay off open mortgages, liens, judgments and HOA dues as part of the settlement process
  • Conduct the physical closing with all parties to the transaction
  • Disburse closing funds and pay off all parties
  • Record the deed and mortgage and all other necessary documents with the Clerk of the Court
  • Issue owner’s and lender’s title insurance policy (approximately 8-12 weeks after closing)

Title fees explained

Settlement:  The fee a title company charges for professional services.

Title search/abstract:  Examination to verify legal ownership of property using publicly recorded documents.

Title insurance:  A one-time fee at closing insuring the homeowner and /or the lender that the property is free and clear of judgments, liens, and any other encumbrances or claims to its value.

Document preparation:  Preparing affidavits, deeds, continuous marriage affidavits, purchase and refinance documents including power of attorney and other documents related to title insurance.

Seller’s documents:¬† The legally compliant preparation of documents on behalf of the seller to transfer a property. These documents include a warranty deed, bill of sale, compliance agreement, CMA and non-identity affidavits, etc.

Attorney fee:  Attorney specific services on a per client basis. Fees must be approved by buyer or seller in advance.

Lien search:  Review of public records at the municipal level for open permits, code violations and municipal liens.

Courier and shipping:  Courier/FedEx costs for closing documents. Documents being sent via courier or FedEx include payoff of mortgages, recording of deeds, condo fees and other time sensitive documents.Wire fee:  Bank charges for incoming and outgoing wires for loan payoffs, seller proceeds and creditor payments.

Archive/scanning fee:  Electronic storage fee of all closing documents as required by state law.

Have more questions on title fees?  Please contact us at 305-271-0100 or info@theclosingcompany.net

What does a title company do for you?

Our title services explained

What buyers need to know right now about loans: Emphatic tips from a title agent!

From our vantage point, an average of ¬†50% of files cancel due to financing issues. A recent buyer had to go through four properties until one qualified for conventional financing. ¬†These were qualified borrowers with long term employment and large down payments. ¬†But files don’t necessarily have to go that route with some advance inquiry and planning by the borrower. ¬†Borrowers need to be more proactive than ever with their loan process and stay on top of their lender for answers and results on a daily basis.Yep, you read that right on a¬†daily basis.

Here are some tips we feel emphatic about:

Do not apply for your loan through an 1800# or a banking representative at your bank: Neither will likely get your loan closed and they are only “order takers” not mortgage /home loan professionals. No matter how good your relationship is with your bank or how much money you have deposited, it wont make any difference during the loan process. Neither will using a lender you have already had a loan with. They treat every new loan as if though they have never met you and you are a stranger off the street. The only exception to this rule is private banking for high net worth individuals.

Be very wary of online-based lenders such as Quicken loans, Rocket Mortgage etc.: Though they are bonafide, licensed lenders, South Florida is a unique lending market fraught with hurdles for borrowers. They may deny your loan  a few days before closing and many times they will cut off all communication with you after denying your loan. We call this the AWOL loan officer situation , of which we have seen dozens.  This will jeopardize your deposit, waste money on upfront costs and put your deal into a tail spin.

Get estimates from minimum 2-3  mortgage professional recommended by a friend, family member or real estate professional who did a closing with them within the last 1-2 years: Ask them what rate they received and what their closing costs were, to have a point of reference going into the conversation. However, do not let friends, family or a real estate professional cloud your judgment when making this decision. Often, the most demanding, exacting, tough talking loan officers are the only ones who close.

If you are self-employed in any way (Sole Proprietor, a 1099 contractor, own a company but issue W2), you will likely need a mortgage broker/lender, not a conventional bank:   Setting up and vetting a self employed borrower for underwriting in this situation is trickier than a W-2 employee , but someone with experience will know how to get it done.

The new consumer finance laws really benefit borrowers: All lenders must provide borrowers a Closing Disclosure itemizing all loan fees ¬†before proceeding. Any changes to these fees along the way, require a a revised disclosure thus assuring a “no surprise” closing . Insist on written estimates and let them know you are aware of these changes.

Get a Closing Disclosure Estimate from every lender you are considering using: This will enable you to compare apples to apples and this document will be your road map toward the loan closing. See sample Closing Disclosure Estimate

Be aware of what property issues may cause loan or  insurance problems: Property related issues such as  a low appraisal, termites, older roofs,  outdated electrical wiring, rotting wood, illegal additions, lack of storm shutters can cause insurance or lending issues.

If you are buying a condo and plan to put less than 50% down payment:   Inquire in advance with your lender before even making an offer if your condominium building will even qualify for financing. Any qualified loan professional will ask you to get the financial documents before even considering an application. Note that a high ratio of renters to owner occupied units can make financing unlikely.

The best interest rates go to borrowers who do their homework and understand their situation and risk level for a bank:  Know your credit score and have your W2, bank statements and tax returns ready. If self employed, know your rate and closing costs will be a bit higher as you will be perceived as a higher risk.

Johana Wolf, a successful high-production Realtor¬†with Fortune International Realty feels advance planning is crucial:¬†¬†“Buyers need to get pre-approved before looking at homes and to make sure once they have been approved, that they don’t make any large purchases that might affect their credit scores”, she says. ” Also, properties that don’t fit the zoning laws such a house with two kitchens will cause loan issues. A leaking roof or illegal additions will most likely kill the financing as well. Having a good title agent who will diligently check for liens, code violations and open permits is really important”, she adds.

Questions about your contract or the loan process? Please contact us at 305-271-0100 or info@theclosingcompany.net. Office or video appointments are available.

Disclaimer: The Closing Company, Inc. is not a law firm and is not providing legal or tax advice in this blog.  For legal advice, please consult with a licensed Attorney. For tax advice, consult with a Certified Public Accountant. Hiring an attorney is an important decision which should not be based solely on advertising. The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

Q&A on closing a Renovation (RENO) Loan for that diamond in the rough

Janet Jones, RENO specialist

Janet Jones, Renovation Specialist Wells Fargo

When I recently called a loan officer I knew at Wells Fargo for a buyer ¬†needing urgent assistance after a lender went AWOL on them in the middle of the transaction, ¬†I was surprised to learn that the property they were buying that was in need of capital repairs would be eligible for a “RENO” loan. It could be treated like a conventional loan with competitive interest rates and loan terms. Living in a world of hundreds of acronyms, I first asked the officer if she was now based in Reno, Nevada and she chuckled and said it stood for “renovation” loan. ¬†Duh.

Well, she quickly moved on to qualify the borrower, the property and close the deal in record time. Escrow deposit saved.  Buyer no longer living in a hotel. I wanted to learn more about this loan tool for our realtors and their buyers who wanted to pursue properties that had a lot of potential, but would not qualify for traditional financing where everything must be shiny enough to pass a battery of insurance and lender criteria.  Here is a basic Q&A presented by Janet Jones, Home Mortgage Consultant, Renovation Specialist at Wells Fargo that real estate professionals may find useful:

  • How does a RENO¬† loan generally work and what are they generally used for? ¬†¬†Renovation loans allow the client to purchase or refinance a home and add the cost of the improvements to the loan.. so there is only 1 mortgage!¬†¬†¬† Most often in a purchase situation they are used when a client wants to buy a home that will not meet conventional or FHA property standards.¬† If the home won‚Äôt pass an appraisal then repairs required would have to be done before closing and often the seller does not desire to do the repairs or have the funds to do so.¬† The buyer cannot do the repairs before closing because they do not own the property.¬† So.. the deal would be dead unless the buyer has cash.¬† The renovation loan is the solution in this case as it will allow the buyer to write a contract on the home in almost whatever condition it is in and then obtain a bid for the repairs from a licensed contractor. The contract + bid for repairs + 10% repair contingency are added together to create the total project and then the lender determines the loan from there.¬† The repairs are approved and contractor is validated and once the loan is closed and the buyer owns the property the repairs/renovations are done. The lender holds the money¬† for the repairs in an escrow account that is distributed in draws during the repair/renovation phase. ¬†How the contingency works is the 10% is added for ‚Äúsurprises‚ÄĚ and cost overruns.¬† If funds are not used they are applied to the principal of the clients loan. ¬†Another scenario that renovation is used for is when a buyer finds a home they love or location they love but the home itself is missing something the buyer really desires in a home or the home is dated and they want to remodel the kitchen or bathrooms etc.¬†¬† Currently we have a project for an existing homeowner whose home they have out-grown with new children additions so using the renovation loan to add additional square footage.
  • What type of property is best suited to be considered for a RENO loans?¬† Product works great for single family homes up to 4 unit properties.¬†¬† It allows for various configurations to be made so someone could convert a 4 plex to a duplex¬† or¬† duplex to a 3 plex‚Ķ. Or even convert a 6 plex to a 4 plex.¬† The max final project must be 4 units or less.
  • Purchase¬† or refinance?¬† Both.
  • Residential or commercial?¬† Residential.¬†¬† Individuals¬† using the conventional renovation loan can purchase investment properties.
  • What is the loan amount range?¬† Max loan at Wells Fargo on conventional in FL is $417,000.¬† We are piloting a non-conforming product¬† in CA but not available to FL as of yet.¬† On FHA the max loan is¬† the max loan per county as on a regular FHA loan without renovation.¬†¬† So the project can be any amount but there is a max we can lend.
  • What are typical interest rates on these type of loans?¬†They are normally approximately .50 point higher than your typical mortgage.. but varies with loan parameters i.e. primary v.s. investment etc.
  • Term periods for loan? ¬†¬†Fixed rates and ARM loans are available with various terms.¬† While product specific you can see 5/1, 7/1, 10/1 ARMs, or 15, 20, 30 year fixed.
  • Are condo renovations considered?¬† Condo‚Äôs can be considered but come with considerable requirements.¬† FHA has a limited number of condo‚Äôs currently approved.
  • What is the closing time frame for approval for this type of loan? ¬†This often depends on the cooperation of all the parties involved.¬† I would give yourself 60 days.
  • Should anything special be written up in the sales contract when buyer will be using a RENO loans?¬† The contract should¬† state in the comment section the buyer is obtaining a Renovation Loan and the contract can also note if loan is conventional or FHA.
  • Should a borrower identify a contractor prior to writing up the contract and check with WF if the contractor is an approved contractor prior to applying? ¬†¬†All contractors must be properly licensed and will be validated.¬† If the job involves several various repairs involving multiple specialties a licensed general contractor will be required.¬† It is a good practice to determine if the contractor has the proper credentials before spending¬† considerable time with them preparing a bid for renovations.¬†¬† Clients can check with us to see if a contractor was prior validated but keep in mind the validation is always updated with each project.
  • What additional loan charges can a borrower expect at closing for this type of loan?¬† Appraisals normally run about $100 more, based on the type of loan and scope of work there will be draws for the contractor and those are typically $150 each, if a 203K standard a HUD consultant is required to be hired and their fees will be determined by project size. Check HUD.gov for grid.¬† On a conventional loan often a feasibility study is required to review the project and has a cost of about $295, there is an origination fee just on the repair portion of 1.5% or $350 whichever is more with max of $750 and¬† title update is done when project is finished.¬† Not sure if you want to actually state the fee amounts.. or just note the items that are different ??
  • Are there any ongoing loan charge outside of closing that they should plan on i.e. escrow holdback for contractors?¬† All items should be included in the loan.
  • What time period does construction have to be completed in?¬† Minimum allowance is normally 30 days with projects up to 6 months or longer with approval based on scope of project.
  • How does a the bank calculate the ‚Äúappraisal‚ÄĚ for this type of loan?¬† Lenders use an ‚Äúafter improved‚ÄĚ value.¬† The contractor bid for the repairs/renovations is key to the appraisal being ordered as the appraiser must be given the bid so they know what the scope of work is to be done.¬†¬† The appraiser will appraise the property as if the renovations have been done. Based on the type of renovation some items will warrant more value than others.
  • Anything additional¬† you would like to add?¬† Conventional has no repair minimum.¬† FHA 20K Limited has no limit.¬† FHA 203K standard has a $5000 limit on repairs.¬†Purchase Primary transaction —- Conventional minimum down is 5% and FHA is 3.5% of the total project.¬†¬†Homes have to be CO‚Äôd for a year for FHA and if conventional have to be deemed substantially complete ( i.e. utilities and drywall).

More question on renovation loans? Please contact Janet Jones directly at Tel 941-468-4296 or janet.e.jones@wellsfargo.com and The Closing Company, Inc for your title/closing needs at info@theclosingcompany.net or 305-521-2080.