Consider rescheduling closing instead of a post-settlement occupancy

Home sellers and buyers look forward to closing day, when the deed to the home transfers; and in a perfect world, everyone moves on with their life. However, there are times when the seller asks to stay in the home after settlement. Ideally, a post-settlement occupancy can be avoided by adjusting the settlement date to accommodate the extra days needed to stay in the home. But alas, the world is not perfect and sometimes a post-settlement occupancy is quickly arranged. Whether you’re the home seller or the buyer, make certain you understand the post-settlement occupancy agreement: what you’re getting into, as well as your risk and liability.

Typically, when someone “rents” a home, a standard lease is used; but since the post-settlement duration is usually very short, the post-settlement occupancy agreement is mistakenly an afterthought to the home sales contract. Here in Maryland, there may be various forms that are specifically used in a particular region for this purpose; such as the one that is used here locally.  Just like the sales contract, the post-settlement occupancy agreement contains terms and conditions, including duration and fee collected.

Additionally, a deposit is collected in case there are damages to the home during the post-settlement occupancy. The buyer usually has a walkthrough prior to the settlement, as well as at the end of the post-settlement occupancy to ensure that there is no damage and the home is conveyed in the condition that is expected.

Unfortunately, the risk of loss and liability to the home during a post-settlement occupancy can be vague. Even if the post-settlement occupancy agreement specifies who is responsible for such loss, there may be additional considerations.

moving dayIt is usually expected that the seller repair any damage they caused during their post-settlement occupancy. But what about damage or loss caused by a fire or an extreme weather event (such as a tornado or a hurricane)?

Even if the post-settlement occupancy agreement is specific about risk of loss and liability, your insurance company might have a different view of risk of loss and liability in a post-settlement occupancy arrangement. Any insurance carried by the home seller may limit or exclude coverage from such damage/loss that occurs during the post-settlement occupancy. Furthermore, the buyer’s home owner’s policy may have exclusions and/or limitations for coverage if the home is vacant or occupied by anyone other than the policy holder. Consult with your insurance company.

Another consideration is that the buyer’s mortgage company may have restrictions about a post-settlement occupancy. The mortgage note may specify that the home be “owner occupied;” which means that the home is not to be rented. A post-settlement occupancy by the seller may infringe on the terms and conditions of the mortgage note. Consult with your mortgage company.

Even if your real estate agent is able to explain the post-settlement occupancy agreement to you, there are considerations other than what is written on the form – you should consult with your attorney before entering into such an agreement.

Due diligence is required before entering into a post-settlement occupancy agreement. Consult with your agent about rescheduling settlement, if possible. Additionally, consult your attorney, insurance agent, as well as your mortgage company to make certain you understand the terms and conditions of the agreement, as well as your liability and risk of loss.

Original published at https://dankrell.com/blog/2012/11/08/consider-rescheduling-closing-instead-of-a-post-settlement-occupancy/

By Dan Krell

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.
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FHA is taking care of business

by Dan Krell &copy 2009
www.DanKrell.com

After almost being absent in the local real estate market, the FHA (Federal Housing Administration) mortgage is now the mortgage of choice. Due to the almost eradication of “Alt-A” and sub-prime mortgages from the marketplace, home buyers who have little money for down payment and need flexible underwriting have once again turned to FHA. FHA is not only assisting home buyers, but financially challenged home owners are also being assisted through FHA refinance programs. The FHA mortgage has once again become the workhorse of the mortgage industry

The cycle of home buyer’s usage of FHA mortgages makes sense if you look at the explosive availability of “Alt-A” and subprime mortgages (which had lower credit and/or documentation requirements) earlier this decade. The increased usage of these mortgages reduced home buyers’ reliance on FHA to make their purchases. This home buyer behavior is supported by a study that determined a home buyer’s “mortgage debt decision” (between a conventional mortgage and a FHA mortgage) is dependent on their down payment, amount of the monthly mortgage payment, and mortgage insurance payments (Hendershott, LaFayette, and Haurin; 1997; Journal of Urban Economics, 41:2, 202-217).

With the decline of “Alt-A” and sub-prime lending, the number of FHA mortgages originated has recently increased significantly. Nick Timiraos and Deborah Solomon reported (The Wall Street Journal, “Loan Losses Spark Concern Over FHA,” September 4, 2009) that as of the 2nd quarter of this year, FHA’s “market share” increased to 23% as compared to 2.7% in 2006. As the number of FHA mortgages increased, so has the number of defaults; Timiraos and Soloman quoted the Mortgage Bankers Association statistics of 7.8% of FHA mortgages in the 2nd quarter were 90 or more days late or in the foreclosure processes (up from 5.4% a year ago).

As FHA’s risk exposure increases, so does concern over FHA’s capital reserves. In a September 18th press release (HUD.gov/news), FHA Commissioner David H. Stevens announced that FHA will take measures to reduce risk in response to the anticipated result of FHA’s annual actuarial study that may indicate that FHA’s capital reserve is below the congressionally mandated 2%. Although Commissioner Stevens stated,” …the fund’s reserves are sufficient to cover our future losses…the FHA will not require taxpayer assistance or new Congressional action,” he made it clear that “…credit policy and risk management changes are important steps in strengthening the FHA fund, by ensuring that lenders have the proper and sufficient protections.”

In addition to the announcement of adding a Chief Risk Officer, Commissioner Stevens announced changes to credit requirements, appraisal requirements, and streamline refinance procedures. Credit requirements on mortgagees (lenders) will change to ensure that lenders are properly capitalized; changes include increased lender net worth from $250,000 to $1M, and submit audited financial statements from supervised mortgagees.

FHA will adopt language from the Home Valuation Code of Conduct (HVCC), already adopted by Fannie Mae and Freddie Mac, which requires appraiser independence. Due to the volatility of the housing market, the FHA appraisal validity period will be decreased to four months from six months.

To tighten standards on FHA streamline refinancing, new procedures will focus on mortgage seasoning, borrowers’ payment history, collection of credit score, and a stated benefit to the borrower. Additionally, the loan amount will be limited to 125% of the value of the home.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 21, 2009. Copyright © 2009 Dan Krell

What are the risks of owning a home?

cloud over home
Accepting the Risks of Home Ownership
by Dan Krell © 2009
www.DanKrell.com
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For many, owning a home is part of their long term financial and personal plan. Unfortunately for some, the responsibilities and risks of home ownership are not well thought out; many first time home owners are unprepared. The benefits of home ownership are often presented to first time home buyers, how about the risks?

During the recent real estate market boon, it seemed as if there were no risks to home ownership. Homeowners, who felt that their home was too much of a financial burden, were able to sell their home quickly and sometimes made a profit. However, when home values began to depreciate, it become all too clear that there are inherent risks to being a home owner, which include decreasing property values, increasing home related expenses, and poor home maintenance.

The real estate market, like other financial markets, is cyclical. There have been escalating market cycles, like the recent “seller’s” market; and there have been depreciating market cycles, some down cycles being much like what we are currently experiencing. Many first time home buyers, who bought homes as a commodity often analyzing their purchases as if it were a mutual fund, are now finding that (unlike mutual funds) selling a home may not be as easy as previously thought. Selling a home in a down market has many considerations, such as an increased marketing time and the possibility of owing more on a mortgage than the value of the home.

During an escalating market, it is easy for people to talk about home value appreciation as one of the benefits of home ownership. Unfortunately, in the recent boon market, many home buyers were caught up in the exuberance of rapid appreciation such that they believed that home value appreciation is guaranteed- no matter the type or condition of the home. Some home buyers are now lamenting their purchases because they bought homes they did not much care to live in but rather for the perceived “investment” value.

Many first time home buyers are also not prepared for increasing monthly housing expenses. Keep in mind that a first time home buyer’s monthly mortgage payment is already more than their monthly rent. Because of rising property tax and increasing utility costs, home buyers need to consider that the associated cost of home ownership will most likely increase over time. Although some of the initial increase may be offset by an interest tax deduction, the increases often add more to monthly expenses than the savings of the deduction.

Maintenance is an ongoing expense that is often overlooked by home buyers; all homes, including new homes need regular maintenance. Lack of home maintenance becomes a threat to anyone’s home leaving the home’s systems, walls, and foundation vulnerable to the elements, which can erode the home’s value.

Be prepared to take on the risks of home ownership. Take into account the reasons for owning a home as well as the financial responsibility you place upon yourself. Although long term home ownership has proved to be a good investment for many, value appreciation is not guaranteed. Additionally, the cost of home ownership along with future increases should be anticipated. You can get more information about the benefits and risks of home ownership by visiting HUD (HUD.gov), Fannie Mae (FannieMae.com) and Freddie Mac (FreddieMac.com).

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of June 15, 2009. Copyright © 2009 Dan Krell.