LEGAL QUESTIONS AND ANSWERS
Q: What is a contract of sale?
A: A contract of sale is an agreement for the purchase and sale of real estate. It acts as a ‘roadmap’ for the transaction, because it defines the rights and obligations of the purchaser and seller. The Contract of Sale should contain an accurate description of the property and all of the terms of the sale; including the price, terms of payment, type of deed , date of possession, provisions for furnishing good title, proration of real estate taxes, water and sewer charges, contingency clauses such as for financing, home inspections and the sale of an existing residence, itemization of personal property and fixtures included in the sale as well as other provisions which may be necessary to protect the needs and interests of the parties.
Q: Should I use an attorney when I buy or sell a home?
A: The purchase of a home may be the largest single investment in your life. In recent years, the process of buying a home has become more complex. Retaining an experienced real estate attorney from the beginning of the transaction can ensure that you protect your investment and helps you avoid costly mistakes throughout the process. Your real estate attorney will be the glue that holds the complex process together. Your attorney’s prime concern is to protect your legal rights and seeing that the proper change of ownership takes place.
Q: What will an attorney do for me in a real estate transaction?
A: There are many important ways that an attorney will help protect your interests during a real estate transaction, including:
• Preparing and/or reviewing the contract of sale, explaining it to you, and modifying it if prepared by another attorney for realtor;
• Assist you with ordering home and termite inspections and negotiating any repair issues and/or monetary credits;
• Review your mortgage commitment and explain your repayment obligations and prepayment rights;
• Assist you with zoning and restrictions on use issues that may exist;
• Order and review the title search to determine that there are not title defects or liens on the property;
• Help resolve any title issues that may arise;
• Obtain title insurance that will cover your ownership interests in the property (lending institutions require that you insure their interest as well);
• Order and review a survey of the property to determine the dimension of the property and that there are not encroachments, etc.
• Coordinate a date for transfer of title and occupancy;
• Determine pro-rated adjustments for property taxes and other expenses;
• Prepare the final closing statement and other necessary documents;
• Explain all mortgage documents and attend to closing of mortgage loan;
• Obtain all necessary documents from seller at closing to ensure that proper transfer of ownership occurs;
• Arrange for transfer of funds from buyer to seller as well as payment of other closing expenses, such as realtor’s commission, surveyor’s fee, realty transfer fee, mortgage payoff, etc.
• Record the Deed and Mortgage and cancel any existing Mortgages and liens;
• Deliver all important documents to you after closing for safekeeping;
This is only a partial list of services performed by an attorney during a real estate transaction. Additional services will be necessary depending on your particular circumstances.
Q: What is an attorney-review-period?
A: An attorney-review period is a provision in a contract which permits the parties to have the terms of the contract reviewed by an attorney who will have the right to request changes to the contract. If the changes are not agreed upon the contract is void. Only realtor prepared contracts are required by law to have a 3 day attorney review period. Non-realtor prepared contracts are not subject to this requirement. An attorney should be consulted within the three day period. After the three day period, the buyer and seller will be bound by the terms of the contract as written, without the benefit of legal advice.
Q: How do I choose a mortgage lender?
A: Choosing the right mortgage lender is almost as important as choosing your home. A competitive interest rate is obviously an important concern; however, you must avoid lenders that have "hidden fees" at closing, or that charge a "prepayment penalty" if you pay the loan back ahead of schedule. (New Jersey lenders are prohibited from charging a prepayment penalty on owner-occupied residential properties, but out-of-state lenders doing business in New Jersey are not prohibited from imposing such penalties.)
Q: What are the "loan fees" charged by mortgage lenders at closing?
A: Mortgage lenders charge some or all of the following fees at closing:
Processing Fee. Normally paid at application and represents the lender’s cost to process the loan. Cost can range from $50-$100 and is paid at application or included in the application fee.
Credit Report. The cost charged to the bank by the service providing credit report services. Additional credit report fees apply for non-married co-borrowers. Initial credit report costs ranges from $50-$60. Additional costs range from $40-$55. Credit report fees are paid at application.
Appraisal. The cost charged to the lender by a certified appraisal company providing the appraisal of your home. The cost of the appraisal is higher for multi-family homes and generally for homes valued in excess of $500,000. Single family appraisals range from $200-$300 and multi-family appraisals range from $450-$550. Fee is normally paid at application.
Flood Certification or Flood Tracking. The cost charged to the bank by the service which notifies the lender whether or not your home is located in a flood zone. Fee ranges from $15-$30 and is normally paid at application.
Origination. Origination fees are normally charged by mortgage brokers, bankers or companies. This is pure commission on the loan and normally won’t be disclosed to you unless your specifically ask. An Origination Fee is normally 1 pt. or 1% of the amount you are borrowing.
Warehouse. Warehouse fees are normally charged by mortgage brokers, bankers or companies which carry a line of credit with a larger bank or finance company. Warehouse fees are the finance charges the lender has to pay on the line of credit which are passed on to the borrower.
Commitment Fee. Fee paid to the lender at the time of commitment. Normally charged in lieu of the attorney review or title review fee. Fee ranges from $100 to $300 and is paid at commitment (point at which bank notifies you of your approval).Tax Service Fee. Charged by lenders who require tax service; a service which informs the mortgage holder of any liens which apply to the home where the mortgage holder would take second position. Standard charge is $83 and is normally paid at closing.
Doc Prep Fee. Fee to prepare the mortgage documentation. Fee can range from $50-$100 and is normally paid at closing.
Attorney or Title Review Fee. Cost charged to the bank by the bank’s attorney for work performed in connection with the mortgage. Fee ranges from $150-$300 and is normally paid at closing.
Rate Lock Fee (Refundable and Non-Refundable) . Cost to lock the rate. For standard 60-75 day rate locks, this fee is normally refundable. For extended rate locks, always ask if the fee is refundable at closing.
Pre-Paid PMI. If PMI is required on your loan, you are required to pre-pay some of this PMI at closing. The amount required may range from 2 to 14 months of your monthly premium, depending on the type of coverage the lender offers. Also, check with the lender to determine if a portion of your closing pre-payment can be refunded when PMI is no longer required.
Escrow fees for property taxes and insurance.
Prorated interest from date of closing to your first mortgage payment.
Always ask your lender for a complete disclosure of all fees you are required to pay and get it in writing before you pay an application fee and/or rate lock fee. Stay away from lenders that charge an origination fee, warehouse fee, attorney review fee or have a prepayment penalty. These charges could amount to thousands of dollars of unnecessary expenses!
Q: Should I refinance my mortgage?
A: Refinancing can be very worthwhile, but does not make good financial sense for everyone. You must balance the savings against the costs of refinancing a mortgage. Refinancing a mortgage is simply taking out a new mortgage to payoff and replace your existing one. A general rule of thumb is that refinancing is worthwhile if you can obtain a new mortgage 1½ - 2 percentage points, or more, lower than your current mortgage interest rate.
There are other considerations, such as how long you plan to stay in the house. It usually takes about three (3) years to realize the savings from a lower interest rate, considering the costs of the refinancing. There may be instances when refinancing is worthwhile, even when the new interest rate is higher. Many people with adjustable rate mortgages (ARM) want to convert to a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan. Other people may want to refinance their home to draw out cash from the equity that has built in their home.
Q: Are title insurance and a survey necessary when I purchase real estate?
A: A title company, prior to issuing title insurance, will perform a search to determine that the seller has good title to the property and what liens affect the seller’s ownership, such as mortgages, judgments, unpaid taxes, etc. The search will also determine if there are any easements, building restrictions, set-back lines or other matters of record which affect the property. Your attorney will review this title search and require that the seller clear up any items which are not permitted by your contract and which would adversely affect your ownership rights. For a one-time premium you will receive title insurance after the closing that will insure your ownership rights. If you are obtaining financing to purchase the property, your lender will require that the title company issue, at your expense, a title policy insuring the validity of your lender’s mortgage. It is recommended (and often required by the lender) that you obtain a survey of the property that you are purchasing and to have the corners marked so that you can define the precise boundry limits of the property. Your title insurance policy will insure that you have good ownership of the land within those defined boundry limits.
Q: Are there different forms of co-ownership of real estate?
A: Yes. When a husband and wife take title to property, they do so as "tenants by the entirety". That means that they each own an undivided interest in the property. In other words, both spouses have an equal right to possession of the whole property. With a tenancy by the entirety, without a Court Order or consent of the parties, neither spouse can deprive the other of that person’s survivorship rights. If one spouse dies, the survivor automatically owns that whole property.
Another form of co-ownership, known as "joint tenancy with right of survivorship" is similar to a tenancy by the entirety in that the joint owners have an undivided interest in the property and when one owner dies the survivors become the sole owners of the property. While only a husband and wife can hold title as tenants by the entirety, any number of individuals can take title as joint tenants.
Another form of co-ownership, known as "tenancy in common" provides each owner with a specific ownership interest in the property. If it is not defined in the deed, the ownership interests are deemed to be equal. With a tenancy in common, each owner is free to sell or mortgage his interest or pass it along to heirs or beneficiaries without the consent of the other owner or owners. When an owner dies, his share passes through his or her estate.
Q: What is Private Mortgage Insurance?
A: Private Mortgage Insurance (PMI) is an insurance policy that protects lenders from losses when a mortgage with a low down payment goes bad. Lenders usually require PMI if the borrower makes a down payment of less than 20 percent of the home’s value. Without PMI, many lenders would be reluctant to make a loan at market interest rates to the borrowers. If PMI is required on your loan, you will pre-pay some of the premium up front at the closing. There will also be an amount paid monthly with your mortgage payment. There is a new federal law which makes it easier for homeowners to cancel PMI. Eliminating these payments could save hundreds of dollars per year. Under the new law, with certain exceptions, PMI automatically will be terminated if the borrower accumulates 22 percent equity in the home and is current on mortgage payments. Also, a borrower with a good payment history may request that PMI be cancelled when he or she has built up equity equal to 20 percent of either the purchase price or the appraised value. Prior to the new law, lenders could require monthly PMI payments long after the borrower built up substantial equity in the home and the mortgage lender no longer faced the risk of losses from default. The new law does not cover mortgages under some government mortgage guarantee programs, such as Federal Housing Administration (FHA) loans. Also, some high risk mortgages are exempt from automatic cancellation. Most borrowers with PMI, however, will benefit from the new law.
Q: Will I have to pay capital gains tax on the sale of my home?
A: A 1997 law allows an individual taxpayer who owns and lives in a home for two out of the last five years to completely avoid paying taxes on a home selling for up to $250,000 and in fact, to repeat the process every two years. Married taxpayers filing jointly can avoid tax on homes that sell for $500,000 or less. Prior to that law, homeowners could defer paying tax on the gain resulting from the sale of their principal residence if, within two years of the sale, they purchased a new home for equal or greater than the sale price of the old one. Additionally, the tax laws at that time allowed a once-in-a-lifetime exclusion of $125,000 in gains for homeowners who were 55 and older when they sold their home. The new law is an extraordinary boon for people who have enjoyed significant increases in their property values.
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