This article looks at the processes involved in house purchase and the roles of the professionals involved, including estate agents, solicitors and conveyance’s.
It also covers the nature and contents of two important documents: the mortgage offer, the mortgage deed.
Role of the estate agent.
Brings the property to the market by private treaty or at auction;
Acts as the agent of the vendor, but can advise both parties on areas where
no conflict of interest exists; Receives offers and advises vendor on acceptance.
Liaises with vendor’s solicitors to progress the sale;
Usually paid on a commission basis – typically 1.5-3%, or may be less or a
Other services offered by estate agents: auctioneering, property listings, property management and letting services, arranging mortgages or insurance, survey and valuation services.
Property Misdescriptions Act.
Estate agents have the responsibility to ensure that advertisements and property particulars are not exaggerated or misleading: descriptions must be accurate, the overall description must give a reasonable view of the property, specific problems, however, do not have to be mentioned, mention can be made of special facilities but should carry a qualifying
statement unless the agent has seen documentary evidence of fitting/guarantees etc., measurements should be accurate to within 10cm, photographs should not be misleading.
Role of solicitors/conveyancers.
Investigation of title.
To ascertain whether property is being sold by the legal owner who is entitled to sell it what it purports to be free from restrictions that would inhibit the sales process. It is possible to get insurance to protect lenders against defective title.
Registry searches: Land registry or land charges registry. Local land charges registry. Parcels index – checks whether land is already registered. Companies register. Bankruptcy search. Commons registration – checks whether it is common land.
Confirm what is/is not included in the sale;
Draw up contracts;
Exchange of contracts – point of no return;
Ensuring funds are in place – deposit, mortgage funds;
Assignment of life policies;
Completion – handover money, receive keys etc;
Legal advice at all stages.
Electronic transfer fees.
Failure to identify a defect in the title. Solicitors owe a duty of care. They can be sued in civil courts. They carry professional indemnity insurance.
Home information packs.
Government measure to improve and simplify the house-buying process. Home information pack to be prepared by (or on behalf of) the seller before the sales process begins and includes: title documents, replies to standard preliminary enquiries and searches, copies of building regulations/planning approval, draft contract, home condition report – based on a professional survey, including an energy efficiency rating.
There is concern as to whether buyers will be able rely on a survey paid for by the vendor.
For leasehold properties it will also include a copy of the lease, recent service charges, accounts and receipts, details of buildings insurance.
Not a contract – so not legally binding. Can be withdrawn if: false or inaccurate information has been submitted by the applicant, the applicant’s financial position changes, a change occurs to the property making it less suitable as security.
Offer letters are standardized and typically contain.
General conditions such as personal details – applicant’s name address etc. Property details – address, description, tenure (freehold etc). Values – for mortgage purposes and for insurance purposes. Requirement for vacant possession. Loan details – amount, term, repayment details, interest, special conditions/charges. Insurances required.
Warranties and conditions.
Disclaimer: offer to lend does not imply a warranty as to the reasonableness of the purchase price or condition of the property. Notification of any additional security required. Offer is subject to satisfactory report on title. The lender can withdraw the offer at any time. The offer is valid for a limited specified period.
Special conditions (that may apply in some cases).
Obligations of a guarantor. Completion of access roads. Work to be carried out by applicant, and lender’s right to check. Rules about stage payments. Consent to mortgage form in respect of all occupants aged 1 7+. Redemption of other mortgages on or before completion.
The mortgage deed/legal charge.
The borrower charges the mortgage as security for the mortgage loan. This is done by deed, which is a binding contract between the borrower and lender. It cannot be varied without the consent of both parties; Contents of the mortgage deed; Details of the lender and borrower; Description and details of the property; Statement that the property is charged as security for the loan; Receipt – acknowledgement that the loan has been made; Details of capital, interest, fess, charges associated with the loan.
To make all payments in accordance with the deed; To insure the property in accordance with the lender’s requirements; To comply with all relevant laws and regulations.
Not to let the property without the lender’s consent; To keep the property in good repair; To comply with the conditions of title; To comply with the terms of the lease (leasehold).
To charge capital, interest and fees in accordance with the deed; insure the property if the borrower fails to do so; to apply the proceeds of any claim to the subject of the claim; meet any conditions imposed by statute or title if the borrower fails to do so; let the property as mortgagee in possession; call in the mortgage; apply the legal remedies in the event of default by the borrower; transfer the mortgage, subject to the borrower’s consent; make further advances without the need for a new deed.
Freehold and leasehold estate.
The nearest there is to absolute ownership. There are, however, many possible restrictions: title restrictions imposed by earlier owners; planning and building regulations; rights of utility companies and others; obligations to those who enter the property or pass by it.
Freeholder creates a lease for a certain period. Leaseholder has rights over the land for a specific period only and pays an annual ground rent.
Significance for lenders.
The lease should not be too restrictive. The lease should have around 30-40 years left after the mortgage will end. Otherwise the property may be inadequate security as it may be difficult to sell. Failure by the leaseholder to comply with any term of the lease could result in the lease being terminated and reverting to the freeholder. This is serious for the lender, whose security would be lost. Lenders therefore insert clauses in the mortgage deed requiring leaseholders to maintain the lease and enabling the lender to maintain it if they do not.
Commonhold and Leasehold Reform Act 2004 changed the rules under which leaseholders can collectively buy the freehold. The building must contain two or more flats.
At least two thirds of the flats must have leases originally granted for more than 21 years.
No more than 25% of the internal floor area (excluding common areas) must be non-residential. Leaseholders who do not participate can lease their flats from the new
The Act introduced a new type of tenure (‘commonhold’) as an alternative to owning leaseholds in blocks of flats. The block is known as a multi-unit property, and each flat is known as a unit.
A commonhold association is formed – it is a company and will manage the overall estate.
It must have a commonhold community statement showing the rights and obligations of individual unit-holders, and other essential rules. The land must be registered as commonhold with the Land Registry. Each individual owns the freehold of his unit and is a member and shareholder of the commonhold association. The association collects a ‘commonhold assessment’ – the equivalent of a management charge from each member.
Common areas in the overall property belong to the association.
Easements and covenants.
Easements and covenants ‘run with the land’ ie they are passed on to subsequent purchasers and can only be removed by the courts; if any one person or body objects to their removal, they remain in place.
The right of one person over the land of another, eg: right of way; right of light or prospect (view); right to ventilation; right to hang a sign on another property;
The land that enjoys the right is the dominant tenement. The land over which the right is held is the servient tenement.
Positive covenants: a condition imposed by an earlier owner, specifying something that subsequent owners must do. Restrictive covenants: Similar, but this time specifying what must not be done.
Now compulsory for all transfers of land.
HM Land Registry – three registers.:
1. Property Register – description, plan, map, title number, beneficial
2. Proprietorship Register – details of the owner and the nature of the title.:
Absolute title: clear title to the property is established;
Good leasehold: the leasehold is good but the freeholder’s title may not be
Possessory title: when the title deeds are missing, or when someone
occupies someone else’s land without redress (squatter’s rights):
right to the land can be claimed after 12 years but the Land Registry will only
convert to absolute title after a further 3 years (15 in total). Qualified title: there is some defect in the title.
3. Charges Register – any charges over the property, eg rights of mortgagees
or spouse’s interests registered under the Family Law Act 1996.
Rights over unregistered land can be registered at the Land Charges Registry. The most common types of charge registered here are: Legal mortgages not protected by deposit of title deeds (eg second mortgages). Spouses’ interests registered under the Family Law Act 1996.
Full title guarantee – free from charges and encumbrances. Limited title guarantee. No guarantee.
Factors affecting the market.
Mortgage interest rates are linked to the Bank of England’s base rate, which is manipulated by the Monetary Policy Committee (MPC) to influence the level of inflation and hence the state of the economy.
When rates are low, people are tempted to borrow more and this can raise prices and lead to a property boom. The MPC can raise rates to dampen the market and avoid an unwanted boom, but this may cause problems for those with large mortgages.
Two elements of inflation in the house price market: General inflation, i.e. a decrease in the spending power of money – tends to go together with low interest rates.
House price inflation – may be higher if interest rates are lower, since mortgages seem to be cheaper.
State of the economy.
When employment is high, prospects good, interest rates low and stable, more people have the confidence to enter into mortgage transactions. In times of recession, people are unwilling to increase mortgages and many may be unable to repay them, so house prices tend to fall.
Supply and demand.
Clearly the above factors are to some extent linked, and together they may influence the relative demand for houses. If there are fewer buyers than sellers, the prices tend to fall.
Borrowing for other purposes. Another factor influencing the mortgage market is the increasing use of mortgage-secured borrowing for other purposes, eg car finance, holidays,
consolidating credit card debts.
Role of the mortgage adviser.
This topic covers the role of the adviser in assisting the customer to select an appropriate mortgage, including: basic principles of affordability, suitability, risk, etc; ethical considerations; information supplied by customers.
Affordability, suitability, etc.
The adviser must ensure, as far as possible, that the customer will be able to afford any solution that is recommended. A number of key issues should be covered.
Customer’s occupation, career path that will lead to higher income; Monthly disposable income and expenditure; How does the customer run his bank account? Usually in credit?
What effect would increases in interest rates have? If money is tight, how would the customer feel about a mortgage that started lower but increased payments later on – a discount or low fix, for example? Are there are any other likely expenses that will affect affordability? Sufficient funds to pay the required deposit and cover expenses and charges?
The following issues will need to be considered in assessing suitability. The customer’s objectives and future plans; affordability (see above); product is appropriate to customer’s needs and circumstances now and later; early partial repayments or repay the whole loan early? Eligibility for the mortgage – income multiples, loan-to-value and so on; product structure is the most suitable for that customer from the range of products considered – interest only, repayment, fixed, variable, etc; the term of the mortgage meets the customer’s needs and circumstances; no recommendation should be made where there is not a suitable mortgage product from within the range considered.
The customer’s attitude to, and awareness of, risk eg: the home is at risk if the borrower fails to keep up repayments on the mortgage; borrowing a high percentage of the value presents the risk of negative equity; interest rate risk – rates can increase, making the repayments higher fixed rate risk -there is a risk that variable rates could fall below the fixed
rate; variable rates could rise by the end of a fixed rate or discount term; repayment vehicle on an interest only mortgage may underperform.
Key considerations would be: the age at which the customer would like to repay the mortgage; shorter terms require higher monthly repayments; if early repayment is planned, avoid mortgages with penalties; avoid mortgages that take customer into retirement.
The mortgage adviser has a great deal of responsibility, as his advice will result in the client taking on a large long-term commitment. Getting it wrong could cause major problems and distress for the customer.
Advisers must take all the necessary steps to be aware of the client’s circumstances, needs and objectives before giving advice and recommending a suitable product.
It is also important to establish the client’s attitude to risk – some mortgage products involve a greater element of risk than others. The adviser must then be able to show clearly how the product that is being recommended meets the client’s precise needs and objectives,
without jargon. Customers’ interests – a firm must pay due regard to the interest of its
customers, and treat them fairly. The concept of treating customers fairly is central to the FSA’s principles, and is a key element of one of its statutory objectives – securing an
appropriate level of protection for consumers. In reality, the FSA has limited ability to deliver ‘fairness’ through regulation, as the concept of fairness will differ for different products, services and customers.
As a result, the FSA has taken steps to address TCF, by putting measures
in place to: improve the information provided to customers; increase standards of risk management and transparency for customers; improve complaint handling; In many cases the measures seek to improve or clarify what is already in place, rather than develop new rules.
Advising clients in arrears.
Options include: capitalising the arrears; reaching an agreement to pay off the arrears over an agreed period; paying interest only for an agreed period – repayment mortgage only; work through income and expenditure with an expert to adjust the budget; sources of advice: Citizens Advice Bureau, Money Advice Centres and Consumer Credit Counselling Service; increasing the term on a repayment mortgage to reduce the payments; –
surrendering the repayment vehicle, eg endowment/ISA.
The borrower should be warned he may not receive the full value of the product on early surrender – he then has no method of repaying the mortgage at the end of the term; trading down to a cheaper property and use the cash raised to settle the arrears.
Handing over the keys.
Those who feel this is an option should be warned that they will still be responsible for paying the mortgage until the property has been sold by the lender. This will lead to even more arrears being added; the arrears will be taken from the sale proceeds in addition to the original mortgage; the price attained for the house is unlikely to be the same as for a normal sale; their credit record will be seriously blemished.
For those in serious debt, bankruptcy could be a viable solution if there is no other way of settling the debt. There are, however, many potential problems: any possessions can be sold to pay off the debts. In a forced sale situation they are unlikely to realise their true value; financial freedom is severely restricted before discharge, including the availability of banking facilities and day-to-day matters; although bankrupts can now be discharged after 12 months, and can theoretically borrow as soon as they are discharged, few lenders will be
prepared to entertain loans and are likely to charge high rates if they do lend; the stigma of bankruptcy will stay with the individual for many years.
Bankruptcy should be seen as a last resort, and customers should be advised
to pursue all other avenues before contemplating it.
Mortgage application forms.
Name(s) of applicant(s).
To avoid mortgage fraud, the lender has to be sure of the true client’s identity. The lender also has to satisfy his obligations under the Proceeds of Crime Act. It is now standard practice to require at least two pieces of identification.
Current permanent address and a contact address if different.
If this has changed in the last three years, a previous address also.
Basis of occupation, eg are the applicants renting or living with parents.
Nationality and residential status.
It is illegal to discriminate on racial grounds, but lenders may only accept
mortgage business on normal terms if the borrower is resident in the UK.
Marital (civil) status; number and ages of dependants.
Clarifies family situation. Also confirms the ages of dependants – for ‘consent to mortgage’ form if any are aged 17 or over and not party to the mortgage.
Occupation and income.
Nature of employment – permanent, temporary, fixed term, etc. Employer’s name and address -to confirm income and employment details. How long employed – if short time, details of previous employer. Basic income. Average overtime and the extent to which this is ‘guaranteed’. Commission, bonuses and other sales-related income. Other income, eg from maintenance payments, trusts, etc If the applicant is self-employed, the lender will require:
name, address and nature of business; details of corporate form – sole trader, partnership;
business plan; how long established – if start-up, previous career profile; accounts for the last three years: balance sheet, profit and loss account.
The important figure for self-employed people is the net profit, which gives an indication of longer-term income prospects. Outgoings. Existing mortgage(s). Other loans. Names and addresses of lenders.Credit and charge cards. Other monthly outgoings. Information on debts, bankruptcy and court judgments.
Property to be mortgaged.
Address or plot number and location. Purchase price. Type of property – house, bungalow, terraced/semi-detached/detached. Method of construction. Tenure of property – freehold, leasehold (if leasehold, years unexpired). Number and type of rooms. Vacant possession – the presence of tenants radically affects market value. Alterations proposed – details, costs, how funded. Proposed use of the property – residential, business, mixed, etc. If new or less than ten years old, name of builder and whether the builder is a member of the NHBC or similar protection scheme. If self-build, details of supervising architect if the builder is not NHBC. The property details are invariably checked when a valuer is sent out to assess the property. Loan required. Amount of advance and the percentage of the purchase price.
How the balance between purchase price and loan sought will be funded. Method of repayment and frequency of payments. Buildings and contents insurance requirements.
Other insurance requirements. Other details. Name and address of solicitor; Name and address of landlord if currently a tenant; Vendor; Selling agent; Declaration; Signed and dated to confirm that the information given is correct to the best of the applicants’ knowledge.
It also authorises the lender to make all necessary enquiries relevant to the application and warns the applicant that appropriate action will be taken including referring the case to the police, if it is believed that information given has been used deliberately to defraud the lender.
Corroborating income etc.
Failure to make appropriate checks to prevent fraudulent references may invalidate mortgage indemnity guarantee cover.
Electoral roll – may not be up to date at all times; typically amended once a year, using 1 October as a cut-off date. Credit reference searches – can be made through credit reference agencies such as Experian and Equifax; they have vast databases of information in respect of previous bad debts and default, County Court judgments and insolvency. Under the Data Protection Act 1998, data subjects have a right to access any information held either on computer or in paper-based files. Credit reference bureaux provide such information for a fee of £2.00.
Scores are apportioned to various features of the application, based on historical data relating to risk. Categories that might be taken into account are, for example: whether the applicant is a first-time buyer or not, their age, their occupation, whether the application has come direct or been introduced, and the amount of the loan. A certain number of points are then allocated in each category and the points for each category are totalled to give the overall score. Applications that receive more than a certain score (often known as the
‘cutoff’ score) will be accepted, while those that do not would be declined.
Many systems will allow for individual scrutiny of ‘borderline’ applications those that achieve a score at or around the lender’s agreed cut-off point. There is no single credit scoring model, and models are not static: they may change with the changing environment.
Credit scoring is especially useful when: the institution has a well developed database on its existing mortgages; it is built into a centralised processing system, such as a telesales; dealing with high volumes of business; lending policy is well defined.
County Court judgments.
When a person is unable to pay his creditors, a civil case can be brought to the County Court. The court can make a judgment against the debtor that then remains in force until such time as the debt is paid.
Mortgage application forms always requires details of such judgments and it is a criminal offence to knowingly conceal them from a prospective lender.
Although County Court judgments (CCJs) do not rule out the ability to get a mortgage, they have to be considered within the context of the application as a whole. A person who has been unable or unwilling to meet obligations in the past may be regarded as less reliable in the future.
Insolvency occurs when a person has liabilities exceed his assets; or cannot meet his financial obligations when they fall due; Insolvency arises when an order is made under the Insolvency Act 1986.
Under the Enterprise Act of 2002, once made, a bankruptcy order remains in force for 12 months in most circumstances. The bankrupt is made responsible to an insolvency practitioner whose primary duty is to ensure that the creditors get as much money back as
possible during the period that the order is in force. A bankrupt cannot borrow (except very nominal amounts) in his own right.
Bankruptcy will normally be declared on the mortgage application form it is a criminal offence not to do so. If undeclared, it will usually be revealed by credit searches, and the bankrupt is legally prevented from executing a mortgage deed.
Individual voluntary arrangements (IVAs).
An IVA is an alternative to bankruptcy. The debtor makes an arrangement with creditors to reschedule outstanding debts over a specified period. Creditors representing at least 75% of the debt must agree.
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