Real Estate Law Questions And Answers
- Do I have to attend the closing?
- What is title insurance and do I need it?
- What is APR?
- What are typical expenses for the seller?
- What are typical expenses for the buyer?
- What is private mortgage insurance and do I need it?
- How does selling one’s house and buying a new house work?
- What is flood insurance?
- What is casualty insurance?
It is usually expected that all parties attend the closing so that any problems that may occur are appropriately addressed. Some sellers choose not to attend and typically presign the closing documents, giving a power of attorney to the lawyer representing them. However, it is uncommon for buyers not to attend the closing since many lenders require a borrower to attend a closing. Exceptions can be made but only if a lender gives prior permission and the lender approves the form of the power of attorney required to close in absentia. If there is no lender, then it is usually acceptable.
Title insurance protects against problems in the title to your property. Mortgage lenders now require all borrowers to buy “mortgagee” title insurance that protects the bank for the full amount of the mortgage in case of title problems (such as Indian claims, unreleased mortgages, forgeries, etc.). An “owners” title policy protects the owner’s equity. Premiums are set by the insurance department and vary depending upon the amount of coverage required. It is paid at closing and is paid only once. However, upon refinancing, the new lender will again require a new mortgagee policy (to be sure there have been no intervening encumbrances). Discounts for the new mortgagee policy at refinance may be available, depending when the original title insurance policy was issued.
APR stands for annual percentage rate. It is intended to educate consumers, i.e. borrowers, as to the true cost of a loan. The annual percentage rate takes into account all the finance charges imposed by a bank so that borrowers can compare which rate is a better rate for them. For example, is the contract rate of 7 percent plus two points a better deal than a contract rate of 7.25 percent plus no points? The answer lies with the APR. Every lender must inform a borrower what the APR of the transaction is. Once that is done, a borrower can compare the APR from one lender with the APR of the other lender, and the lower APR is the better and cheaper rate.
The seller’s largest expense is usually a real estate broker’s fee, which is usually 5 percent to 6 percent of the sales price. Rates cannot exceed 6 percent for residential closings, and are negotiable at the time a seller enters into a listing agreement with a real estate agent. The seller also has to pay a conveyance tax to the state of Connecticut equal to .5 percent (except when the property is worth more than $800,000 or when it is a commercial type of real estate). There is also a town tax equal to $1.10 for every $1,000 of sales prices. Typically attorney fees range from $400 to $600. There will be small recording fees.
Bank expenses fees including but not limited to processing fees, application fees, credit reports, tax service fees, document preparation fees, etc., are less than $1,000 in a typical transaction. Above and beyond that, there may be points. A point equals 1 percent of the mortgage loan amount. This may well be the biggest expense of the buyer. A buyer typically pays a title search fee that is approximately $75 to $175. Title insurance costs approximately $4 per $1,000 of coverage. Attorney fees for representing a bank are typically in the $400 to $500 range and for personal representation $100 to $250 range. Recording fees are typically less than $1,000.
In addition, many banks now require that there be an escrow for taxes and fire insurance, and this typically can be as much as five months’ worth of taxes, depending on when the transaction occurs. In addition to the tax escrow, the buyer reimburses the seller for the taxes prepaid by the seller. It generally works out that between the tax reserve and the amount reimbursable to the seller, a buyer pays seven months of taxes at the time of closing.
The buyer also reimburses the seller at closing for fuel oil, and most fuel oil tanks are 275 gallons. The tank is usually topped off at time of closing, and the buyer reimburses the seller for a full tank of oil. Last, but not least, the buyer may have to pay for private mortgage insurance, which is sometimes paid for one year in advance. The amount of the mortgage insurance varies.
This type of insurance protects the lender against lawsuit due to default by the borrower. This is generally required whenever the loan amount exceeds 80 percent of the fair market value of the property being purchased. It may also be required in other instances. The requirement for this insurance is usually waived after the loan has been reduced to a specific level, but typically there is a mandatory three-year requirement even when the loan-to-value ratio is less than 80 percent. It may last for 10 years.
Ideally, sellers sell their home in the morning and purchase their new home with the proceeds from the sale later that same day. An attorney working with the client will make sure that this happens in this sequence. Typically, a seller gives occupancy to the buyer at the time of closing. However, in some instances, the seller cannot give occupancy to the buyer (because their new home may not be ready for them to move in to). Under those circumstances, a use and occupancy agreement is entered into between the buyer and the seller at the time of closing whereby a firm date is established for the seller to move out of their new home while paying a per diem rent typically based on the carrying charges of the buyer. In a typical use and occupancy agreement, there is an escrow provided and a penalty provided in the event the seller does not vacate the home at the agreed-upon date.
This is a special type of insurance that covers future losses due to flooding, which is not covered by most homeowners policies. If your property is located in an area requiring the purchase of flood hazard insurance, the lender will ask that you demonstrate that you have this insurance and that you have added its name as a loss payee as part of the terms of the financing. As with homeowners insurance, flood insurance covers the risk of any loss due to flooding that may occur during the year for which the premium has been paid. A premium is payable each year.
This type of insurance, commonly referred to as a homeowners policy, protects you, the insured, against loss that could be sustained in the future as a result of fire, theft or other mishap. Because a serious loss could reduce the value of the property below the amount owed to the lender, the lender has the right to be added to your homeowners policy as a party who may be entitled to receive a portion of the proceeds in the event of a loss (“loss payee”).
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