Illegal Addition Means Buyers Risk Inspection, Hefty Fines
Question: We’re considering buying a lovely house in the neighborhood we want. There’s just one little problem: The family room and a bathroom were added in 1991 without a building permit. The seller and Realtor clearly disclosed this to us. The Realtor says “Don’t worry. I’ve never seen the city cause any trouble for additions made without permits.” What is the risk if we buy this house?
Answer: If the city should learn of the illegal addition, I’ve seen inspectors make owners tear out the wallboard so they can check the wiring and plumbing. Also, the homeowner must then get a building permit and pay a penalty fee. Most appraisers, if they learn an addition was built without a building permit, will heavily discount the value of the addition. On the other hand, I know of many illegal additions built many years ago that haven’t caused any problems.
I can’t advise you to proceed with that purchase but, if you do, discount your purchase price to reflect the situation. Of course, make your offer contingent on obtaining the specific mortgage you need.
Federal Law Mandates Appraisal for Borrower
Q: In a recent reply about providing appraisal copies to borrowers, you responded as if the lender has a choice in providing an appraisal copy to the borrower.
The Federal Reverse Bank’s Regulation B, called the Equal Credit Opportunity Act, section 202.5, mandates that a lender provide a copy of the appraisal at no additional cost or provide a form to the borrower for requesting a copy of the appraisal. The appraisal request should go to the lender, not the appraiser.
A: Thank you for clarifying the basis for the lender’s obligation to provide a copy of the appraisal to the borrower.
Celebrate, But Don’t Really Burn Mortgage
Q: In a few months we will make our last mortgage payment after 25 years. Is it OK to burn the mortgage? What should we do to be certain our title is clear?
A: When you make your last mortgage payment, attach a letter notifying the lender that this is your final payment. Ask the lender to clear the mortgage from your home’s title and notify you within 30 days. If you have a mortgage, the lender will record a Satisfaction of Mortgage. If you have a deed of trust, the lender will record a Deed of Reconveyance. If you are buying on a land contract (also called a contract for deed, agreement of sale, installment land sale and other names), the lender (seller) will give you the deed to the property.
Follow up in 30 days if you haven’t received proof that the lender recorded the proper document. This is very, very important. Because they have little financial incentive, many lenders “forget” to promptly record the paperwork to clear your title.
Finally, do not burn the mortgage. It’s OK if you have a symbolic mortgage burning party. But save all your mortgage paperwork just in case you need it later.
Homes’ Square Footage Doesn’t Always Add Up
Q: How is the square footage of a house determined? Is it the size of the rooms on the first and second floors only? Are the garage, basement and attic included?
A: Standard appraisal practice is to measure the exterior of the home’s living areas on all levels, excluding the garage, basement and attic. When I refinanced my house in 1998, several appraisers evaluated my home. All arrived at different square footage for the living areas. But the differences were only about 170 square feet.
In a recent court decision (Furla vs. Jon Douglas Co.), the seller and listing agent represented a home to have about 20% more square footage than it actually did.
But three appraisers who later measured the square footage arrived at three different calculations. The seller and listing agent were held liable for misrepresentation.
As a result of this important case, smart real estate agents and multiple listing services now word their disclaimers: “Information deemed reliable but not verified.”
Value, Not Duration, Is Key to Insurance Policy
Q: Is there a minimum length of time a private mortgage insurance borrower must pay premiums? Will the lender drop the insurance if, after six months, we pay down our mortgage to 80% of our home’s market value? Someone told me we must keep our insurance for two years. Is that true? Also, what is the minimum home down payment today? Can the down payment be 100% gift money?
A: Many lenders, including giants Fannie Mae and Freddie Mac, have guidelines allowing you to drop private mortgage insurance after two years of on-time monthly mortgage payments, if the loan-to-value ratio drops below 80%.
However, if you pay down your mortgage below 80% loan-to-value in less than two years, there is no legal reason the lender cannot drop the insurance requirement, because it is no longer needed.
As for minimum down payments, VA home loans require nothing down. FHA requires about 3% down; private mortgage insurance requires 5% to 10% down; and the new Fannie Mae Flex 97 loan requires only 3% down. Fannie Mae says the 3% can be a gift or it can be borrowed.
Market Appraisals by Realty Agents Preferred
Q: I see you often recommend that comparative market analysis forms be prepared by realty agents as part of their listing presentations. We recently interviewed four agents about listing our home. Each prepared analysis, but each used different data. Only a few of the homes on the four analyses were truly comparable to ours.
We then hired a professional appraiser (at a cost of $350). She did a beautiful, first-class job, compared to the agents’ analyses. We listed at the appraised price and obtained a full-price offer within a week. Why don’t you recommend appraisals instead of analyses?
A: Professional appraisals are fine for estimating the market value of a home before listing it for sale. The comparative valuation appraisal method used for them is essentially the same as a comparative market analysis. But my experience with appraisers, especially in a rising market, is that they tend to be too conservative in their valuations.
To Settle Title Dispute, Ex-Wife Must File Suit
Q: My divorce was final in 1991. We didn’t have much equity in our house, but I paid my ex-husband $7,500 to buy his half of the equity. Unfortunately, we had no written buyout agreement. Fortunately, I had a good job. He never paid any child support for our two children.
My problem is that I want to sell the house. To my surprise, my ex-husband’s name is still on the title. He died in a motorcycle accident in 1995. I went to a lawyer. She tried to get the Divorce Court to reopen the case but, since my buyout was not part of the divorce, that court couldn’t help. Now she says I must bring a quiet title lawsuit against my husband’s estate. But we can’t find any executor or administrator (I don’t think he left any assets). She estimates that will take at least six months. What can I do to clear up this mess?
A: Your lawyer is on the right track. Other than bringing a quiet title lawsuit, there’s no way to clear title to the house in your name alone. Unless your late ex-husband left a will, your two children are probably his only heirs. Since he had no interest in the house after you bought out his share, they might not even have to appear in court.
This situation shows why it is so important in divorces to clear property titles quickly, while everyone can be located. Apparently, when you bought out your ex-husband’s share of the house, you failed to obtain and record a quit-claim deed from him to you. Your failure to do so will now prove costly in both time and money.
Pair Must Sell, Move, Wait, Then Sell Again
Q: My wife and I, both 70, plan to retire soon. We want to sell our city home and use that new $250,000 home sale tax exemption ($500,000 for a married couple). We have also owned a small country house on a lake for about 20 years. We spend almost as much time there as we do in our city home. It seems to me that you once said a person can combine two residence sales if the total doesn’t go over a certain amount. If we can also sell the country home tax-free, then we would buy a retirement home. Where can I find that article?
A: I never wrote such an article. You’re reading quirks into new Internal Revenue Code 121, the new $250,000 home sale tax exemption ($500,000 for a married couple), that don’t exist.
Your situation is typical. You can use the new principal residence tax exemption to first sell your city home, avoiding tax on profits below those amounts. Then you can move to your country home, making it your “main home” principal residence for 24 months. After that time, you can again use the exemption to sell your country home tax free. Please consult your tax advisor for full details.
‘Unlocked’ Interest Rate Can Rise or Fall
Q: I recently refinanced my house. At my first meeting with the mortgage broker, I was quoted 6.5% interest and a 1-point loan fee (1% of the amount borrowed). But a month later, when the final loan approval came in, interest rates had risen. I was told the best rate I could lock in was 6.875% and 1 point.
Since rates were going up, I didn’t want to stop the deal, so I reluctantly agreed and we got our refinance. Can a lender change the rate to whatever he wants at the last minute, knowing the customer is unlikely to cancel at such a late hour?
A: Yes. The mortgage broker probably offered to lock in your interest rate at the time of loan application, usually for a modest lock-in fee. Since you didn’t lock in that bargain 6.5% interest rate, the lender was free to raise it before the loan closed. If interest rates had dropped, of course, you would have benefited by not locking in at 6.5%.
Buyer Wants Contact to Be a Relative Success
Q: Should special steps be taken when buying a home from a relative? How can we reduce costs? Do we need a real estate agent?
A: You really don’t need a real estate agent for a simple sale like this. But before proceeding, obtain your relative’s permission to have a professional inspection of the property, preferably by a member of the American Society of Home Inspectors. Be sure to accompany the inspector to discuss any structural defects your relative may have forgotten to disclose. If serious problems are discovered, you can either back out of the sale or adjust the agreed price.
A local real estate attorney can prepare a simple sales agreement between you and your relative, including any required disclosures. The attorney can also arrange for the closing of the sale, including your receiving an owner’s title insurance policy. Depending on the state where the property is situated, the sale closing will be at the attorney’s office, an escrow or title firm or at the lender’s office if you are obtaining a new mortgage.
