Many borrowers, although familiar with their loan officer or Realtor, ask, “What is escrow?” It is defined as a third person with whom a contract is deposited – kind of a neutral party, a referee for a real estate transaction.
For a contract to be valid it needs two parties, so part of the contract is that both parties agree who will do the escrow, the holder of their contract. In real estate, escrow is a third party that the buyer and seller, or in the case of a refinance the borrower and the lender, use to transact funds from one party to the next; escrow is also referred to as the settlement agent.
Given instructions agreed to by both parties, the escrow holder agrees to accept funds from the buyer, and the buyer's lender if necessary, and then after paying costs for other services involved in the transaction, deliver the funds to the seller once all promises are fulfilled in exchange for a grant deed from the seller that is delivered to the buyer. Escrow is neutral and has no agency contract with the buyer or seller, its agency is with the transaction.
Escrow plays a vital role in real estate transactions since large sums of money flow through escrow companies on a daily basis for purchase and refinance transactions. Escrow is not only charged with making sure the initial instructions are followed but also that neither party is able to change the transaction without the consent of the other. At closing, escrow is responsible for disbursing funds to all the parties and services involved in the transaction, refunding overages to buyers or borrowers, pay fees to termite, title, home warranty, lender and themselves, and transmit the net proceeds to the seller.
Lastly, after the closing, escrow provides a very detailed accounting of all funds received and disbursed to all parties. A good escrow officer and company are like a good ref in a soccer match – you don’t really notice them unless they mess up.
As the Millennial generation (ages 18-34) continue to buy homes, they are often buying homes with others (in a non-married status). While lenders know that this is one path to them being able to afford a home, it is important that the borrowers go into the process with a few things in mind. And it is important for the borrowers to discuss the situation with the loan officer.
Usually this situation involves creating a pre-purchase agreement, although many couples who have just decided to live together are understandably reluctant to discuss how they will want to deal with breaking up the partnership. A pre-purchase agreement that the house must be sold if either partner aborts the relationship avoids some thorny issues that can arise when one partner stays with the house. But if the house is sold, how are proceeds to be divided?
One approach is to divide the net proceeds by each partner’s contribution to the equity in the house when it is sold. This should include the down payment, settlement costs, share of principal, and ongoing expenses. But often one of the partners might unilaterally work on improving the house, which would call for a higher share. The point is that the partners ought to agree on the general formula at the outset.
When one of the partners remains in the house, the terms of settlement are more complex, especially if the other partner’s name is included on the home loan. There is no sale price, so the partners must agree on an appraisal procedure, who will pay for it, and whether a real estate sales commission should be deducted from the valuation used in the settlement.
And what about paying off the departing partner, especially if the partner remaining in the house doesn’t have the money to pay off the partner who is leaving? A home equity loan is not possible unless both partners become responsible. The departing partner continues to be responsible for the mortgage. It is best to confer with a trained loan originator during the process. They can discuss future considerations in this situation.
It's that time of year. April 15th is fast approaching and borrowers are filing their income taxes. Depending on where a borrower is in a transaction, or in a timeline with negotiating a home purchase, the best advice to a buyer who has not yet filed their taxes is to wait.
The reason is that most lenders & investors require IRS form 4506-T as part of final loan approval to verify the borrower's income. Responding to requests for this form can take several weeks at this time of year, which for borrowers who just filed their taxes may delay their loan approval and closing.
So what are loan officers telling clients who haven’t filed their taxes with the IRS? Typically the borrower will qualify on 2014 income, and lenders can obtain 4506 results for 2014 and use that income to qualify. Borrowers should consider filing electronically. Even though it can (will) take several weeks from filing to get the results from the 4506 request, it is much faster than mailing in a return. If a borrower files an extension, they have until October 15th to file their final return. And if a borrower is in escrow and needs income from 2015 to qualify, they need to have filed already, or file immediately, to increase their chance of closing before the end of April.
Everyone should remember that the IRS is not always the speediest of respondents and if that 2015 income is needed for qualifying there is a very good chance the loan may be delayed waiting for those results. It is also important for borrowers to know that when it comes to documentation, every i must be dotted and t crossed. The days of limited or “no doc” loans are gone as investors want all information complete and verified.
There are more people born between 1980 and 1999 – what the Census Bureau defines as Millennials – than any other generation. So their economic clout is obvious. How has the recession affected the job market for Millennials, which in turn impacts their ability to buy a home?
According to Wells Fargo Securities, LLC Economics Group, a greater number of young adults are now employed in leisure & hospitality, and retail industries than before the recession. These two industries employ the largest share of Millennial workers and a growing number of young adults are finding employment in these low-paying sectors. About 45% of employees in the retail sector and 60% in the leisure & hospitality sector are Millennials.
Traditionally, most young adults have found employment in industries that require few skills and more flexible hours. This has held true among the Millennial generation, mainly because of the weak labor market. Millennials have also moved into lower-paying industries at a faster rate than their older counterparts. Conversely, the construction and financial industries have evidenced a decline in the share of young workers and the manufacturing and information industries employ the least amount of young adults.
What does this mean for the lending and housing market? If indeed younger people are filling out the ranks of lower-paying jobs, they tend to have lower incomes, and take longer to save for a down payment. Creative programs may have to be developed, and with them various underwriting policies, in order to encourage first time home buyers who will lead to current home owners being able to move up.
Rates have not changed much in recent weeks, and borrowers refinancing are still a noticeable portion of many lender’s business. Borrowers have to contend with the usual underwriting process for credit, have an appraisal done, and qualify for the mortgage. But one somewhat surprising issue that some lenders and borrowers are encountering, that often halts a refinance, is a remodel!
Lenders are having borrowers, who are almost through the process, tell them that not only has there been some remodeling done, but it is still going. Remodeling done without a permit is a problem (it changes the value of the home, but is often illegal), and remodeling in process can take months while waiting for the required building permit.
These events will often hold up the refinance. On the face of it, the lender should not be concerned about improvements in the property that increase its value, since that makes the loan a safer investment. But in fact the lender is concerned that in the process of making an “improvement”, the owner may have violated local building codes, which could make the property unsalable in the future. This danger is greatest when the owner does the work himself and doesn’t want to be bothered with (or doesn’t know about) the local building codes.
If a loan officer asks about improvements, it is because he or she is following the instructions of the underwriter, who wants to make sure that work on the house has been done legally and is in compliance with building codes. The underwriter will want this verified by the local government entity that enforces the codes.
Any borrower refinancing while having improvements in process may be asked by the loan officer to come back after they have been completed and document that they are in compliance with the codes. Generally speaking, borrowers should not refinance and remodel at the same time.
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