This article examines the processes involved in buying a home and the roles of the professionals involved, including realtors, lawyers, and transportation.
It also covers the nature and content of two important documents: the mortgage offer, the mortgage deed.
Role of the real estate agent.
Puts the property on the market by private treaty or auction;
Acts as the seller’s agent, but can advise both parties on areas where
no conflict of interest exists; Receive offers and advise seller on acceptance.
Liaise with the seller’s lawyers to advance the sale;
Usually paid on a commission basis – usually 1.5-3%, or can be less or
Other services offered by real estate agents: auctions, property listings, property management and rental services, mortgage or insurance arrangement, survey and appraisal services.
Property Description Errors Act.
Real estate agents have a responsibility to ensure that listings and property details are not exaggerated or misleading: descriptions must be accurate, the overall description must give a reasonable view of the property, specific issues, however, should not be mentioned, the mention may be made of special installations but should bear a
Unless agent has seen documentary evidence of installation / warranties etc., measurements should be accurate to within 10cm, photographs should not be misleading.
Role of notaries / carriers.
Check if the property is being sold by the legal owner who has the right to sell it what it claims to be free from restrictions that would hinder the sale process. It is possible to purchase insurance to protect lenders against a defective title.
Cadastral research: cadastre or cadastre. Register of local land charges. Parcel Index – checks if the land is already registered. Business register. Bankruptcy research. Common record – checks if this is common ground.
Confirm what is / is not included in the sale;
Exchange of contracts – point of no return;
Make sure the funds are in place – deposits, mortgage funds;
Assignment of life insurance policies;
Completion – handing over money, receiving keys, etc.
Legal advice at all stages.
Electronic transfer fees.
Failure to identify a defect in the title. Lawyers have a duty of care. They can be prosecuted in civil courts. They benefit from professional liability insurance.
Information packs about the house.
Government measure to improve and simplify the home buying process. Home information package to be prepared by (or on behalf of) seller prior to the start of the sale process and includes: title documents, responses to standard preliminary inquiries and research, copies of building regulations / planning approval, project of contract, report on the condition of the house on a professional investigation, including an energy efficiency rating.
One wonders if buyers will be able to rely on a survey paid by the seller.
For leasehold properties, it will also include a copy of the lease, recent service charges, accounts and receipts, building insurance details.
Not a contract – therefore not legally binding. Can be withdrawn if: false or inaccurate information has been submitted by the applicant, the applicant’s financial situation changes, a change occurs in the property making it less suitable as collateral.
Letters of offer are standardized and usually contain.
General conditions such as personal data – name of the applicant, address, etc. Securities – for mortgage and insurance purposes. Vacant possession requirement. Loan details – amount, term, repayment details, interest, special conditions / charges. Insurance required.
Guarantees and conditions.
Disclaimer: The loan offer does not imply any guarantee as to the reasonableness of the purchase price or the condition of the property. Notification of any additional security required. The offer is subject to a satisfactory report on the security. The lender can withdraw the offer at any time. The offer is valid for a limited fixed period.
Special conditions (which may apply in certain cases).
Obligations of a guarantor. Completion of access roads. Work to be carried out by the applicant and the lender’s right of control. Rules on installment payments. Mortgage consent form for all occupants aged 1 to 7 and over. Repayment of other mortgages on or before completion.
The mortgage deed / legal charge.
The borrower charges the mortgage as collateral for the mortgage loan. This is done by deed, which is a binding contract between the borrower and the lender. It cannot be changed without the consent of both parties; Content of the mortgage deed; Details of lender and borrower; Description and details of the property; Declaration that the property is charged as collateral for the loan; Received – acknowledgment of receipt of the loan; Details of principal, interest, fees, charges associated with the loan.
Make all payments in accordance with the deed; Insure the property in accordance with the lender’s requirements; To comply with all applicable laws and regulations.
Do not rent the property without the consent of the lender; Keep the property in good condition; Comply with the conditions of the title; To comply with the terms of the lease (lease).
Rights of the lender.
To charge principal, interest and costs in accordance with the deed; insure the property if the borrower does not; to apply the proceeds of any claim to the subject matter of the claim; meet any conditions imposed by law or title if the borrower does not; leave the property as a mortgagee in possession; call the mortgage; apply remedies in the event of default by the borrower; transfer the mortgage, subject to the consent of the borrower; make further progress without needing a new act.
Freehold and leasehold property.
The closest is freehold. However, there are many possible restrictions: title restrictions imposed by previous owners; planning and construction regulations; the rights of utility companies and others; obligations to those who enter or pass through the property.
Freeholder creates a lease for a certain period. The tenant has rights to the land for a specific period only and pays annual ground rent.
Importance for lenders.
The lease should not be too restrictive. The lease should be around 30 to 40 years after the end of the mortgage. Otherwise, the property may be insufficiently secured as it may be difficult to sell. Failure by the tenant to comply with any condition of the lease could result in the termination of the lease and its return to the owner. This is serious for the lender, whose security would be lost. Lenders therefore insert clauses in the mortgage deed obliging tenants to maintain the lease and allowing the lender to maintain it if they do not do so.
The Commonhold and Leasehold Reform Act 2004 changed the rules under which tenants can collectively buy freehold. The building must contain at least two apartments.
At least two-thirds of apartments must have leases initially granted for more than 21 years.
No more than 25% of the interior floor area (excluding common areas) must be non-residential. Tenants who do not participate can rent their apartments from the new
The law introduced a new type of tenure (“common property”) as an alternative to owning leasehold land in apartment buildings. The block is known as a multiple unit property and each apartment is called a unit.
A common property association is formed – it is a corporation and will manage the entire estate.
It must include a common community declaration indicating the rights and obligations of individual unitholders, as well as other essential rules. The land must be registered as common property with the land register. Each individual has full ownership of his unit and is a member and shareholder of the common association. The association perceives a “common assessment” – the equivalent of a management charge from each member.
The common areas of the whole property belong to the association.
Easements and restrictive covenants.
Easements and covenants “run with the land”, that is, they are passed on to subsequent buyers and can only be removed by the courts; if a person or body objects to their removal, they remain in place.
The right of one person over another’s land, for example: right of passage; right of light or perspective (sight); right to ventilation; right to hang a sign on another property;
The land that enjoys the right is the dominant housing. The land on which the right is held is the serving accommodation.
Positive Commitments: A condition imposed by a prior owner specifying something subsequent owners must do. Restrictive alliances: similar, but this time specifying what should not be done.
Now mandatory for all land transfers.
HM land register – three registers:
1. Property register – description, plan, map, title number, useful
2. Register of owners – contact details of the owner and nature of the title:
Absolute title: a clear title to the property is established;
Good lease: the lease is good but the title of the landowner may not be
Title of possession: when title deeds are missing, or when someone
occupies someone else’s land without redress (squatters rights):
the right to the land can be claimed after 12 years, but the land register
convert to absolute title after 3 additional years (15 in total). Qualified Title: There is a defect in the title.
3. Register of charges – all charges on the property, for example mortgage rights
or the interests of the spouse registered under the Family Law Act 1996.
Rights to unregistered land can be registered in the Land Royalty Register. The most common types of charges recorded here are: Legal mortgages not protected by the deposit of title deeds (for example, secondary mortgages). The interests of spouses registered under the Family Law Act 1996.
Full title guarantee – no fees or charges. Limited title warranty. No guarantee.
Factors affecting the market.
Mortgage interest rates are tied to the base rate of the Bank of England, which is manipulated by the Monetary Policy Committee (MPC) to influence the level of inflation and therefore the state of the economy.
When rates are low, people are tempted to borrow more, which can drive up prices and lead to a real estate boom. The MPC can raise rates to cushion the market and prevent an unwanted boom, but it can 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 the job – permanent, temporary, fixed-term, etc. Employer name and address – to confirm income and employment details. How long employed – so little time, details from previous employer. Basic income. Average overtime and the extent to which it is “guaranteed”. Commissions, bonuses and other income related to sales. Other income, for example support payments, trusts, etc. If the applicant is self-employed, the lender will require:
name, address and nature of the business; details of the corporate form – sole proprietorship, partnership;
business plan; how long has it been established – if start-up, previous career profile; accounts for the last three years: balance sheet, profit and loss account.
The important figure for the self-employed is net profit, which gives an indication of longer-term income prospects. Expenses. Existing mortgage (s). Other loans. Names and addresses of lenders Credit and debit cards. Other monthly expenses. Information on debts, bankruptcy and court decisions.
Property to mortgage.
Address or number and location of the parcel. Purchase price. Type of property – house, bungalow, semi-detached / semi-detached / detached. Method of construction. Property tenure – full ownership, lease (if lease, unexpired years). Number and type of rooms. Vacant property – the presence of tenants drastically affects the market value. Proposed changes – details, costs, mode of financing. Proposed use of the property – residential, commercial, mixed, etc. If new or less than ten years old, name of the manufacturer and whether the manufacturer is a member of NHBC or a similar protection system. If self-build, details of the supervising architect if the builder is not NHBC. Property details are invariably checked when an expert is sent to assess the property. Loan required. Amount of advance and percentage of purchase price.
How will the balance between the purchase price and the loan sought be financed. Method of reimbursement and frequency of payments. Insurance requirements for buildings and contents.
Other insurance requirements. Other details. Name and address of lawyer; Name and address of the owner if he is currently a tenant; Seller; Sales agent; Declaration; Signed and dated to confirm that the information provided is correct to the best of the candidates’ knowledge.
It also authorizes the lender to make all necessary inquiries regarding the claim and notifies the claimant that appropriate action will be taken, including referral of the case to the police, if it is believed that the information provided was used deliberately. to defraud the lender.
Corroborating income, etc.
Failure to perform the proper checks to avoid fraudulent referrals may void your mortgage indemnity guarantee coverage.
List of electors – may not be up to date at all times; usually changed once a year, using October 1 as the deadline. Credit reference searches – can be done through credit reference agencies such as Experian and Equifax; they have extensive databases containing information on bad debts and past defaults, county court judgments and insolvency. Under the Data Protection Act 1998, data subjects have the right to access all information stored on computer or in paper files. Credit reference bureaus provide this information for a fee of £ 2.00.
Scores are assigned to the different functionalities of the application, based on historical risk data. The categories that could be taken into account are, for example: whether the applicant is a first buyer or not, his age, his profession, whether the request came directly or was introduced, and the amount of the loan. A certain number of points are then awarded in each category and the points for each category are added to give the overall score. Apps that receive more than a certain score (often called
“Threshold”) will be accepted, while those that are not will be refused.
Many systems will allow individual review of “borderline” applications, those that score at or near the threshold agreed to by the lender. There is no single model of credit scoring and the models are not static: they can 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 that exceed their assets; or cannot meet its financial obligations as they fall due; Insolvency arises when an order is made under the Insolvency Act 1986.
Under the Companies Act 2002, once issued, a bankruptcy decision remains in effect for 12 months in most cases. The bankrupt is made accountable to an insolvency practitioner whose main task is to ensure that creditors recover as much money as
possible during the period when the order is in effect. A bankrupt cannot borrow (except for very small amounts) on his own.
Bankruptcy will normally be declared on the mortgage application form. Failure to do so is a criminal offense. If it is not declared, it will usually be revealed by credit searches, and the bankrupt is legally prevented from performing a mortgage deed.
Individual Voluntary Arrangements (IVA).
An IVA is an alternative to bankruptcy. The debtor enters into an agreement with the creditors to reschedule the unpaid debts over a specified period. Creditors representing at least 75% of the debt must agree.
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