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Steps to Your Front Door: Understanding the Process for Buying a Home
in Illinois
By Gregory A. Braun, Partner, McCormick Braun Friman, LLC
“It will be a simple closing.” This utterance sends chills through the
real estate professional. “Well, not so fast,” can be the only truthful
reply. When you know all that goes into making a closing successful, it
cannot be described as simple. However, a closing on a home can seem
simple when everyone involved knows how to do their jobs and no one has made a
false assumption or missed a step.
Experience shows that competing agendas and a lack of knowledge by one or
more participants in a transaction complicates closings for everyone.
Also, closings have become increasingly frustrating as the government and
Freddie Mac/Fannie Mae/FHA continually enact a host of additional requirements.
A tough economy has made lenders and their underwriters even more critical of
borrower’s credit and sellers often struggle to deliver clear title or a clean
home as well as all the other details in between.
This article aims to educate Buyers and Sellers in the beginning stages of
the sales process. I have written from the prospective of a Buyer, who has
more hoops through which to jump. However, what affects Buyers also
impacts Sellers, but the Seller’s preparations are addressed in full as well.
The most critical factor in having a great outcome in the real estate sales
process is the first step of assembling the team to assist. The lender,
realtor, title company, inspector and attorney are critical. I always
think of the term “The Butterfly Effect.” This is a metaphor for the
concept of sensitive dependence on initial conditions in the chaos theory;
namely that small differences in the initial condition of a system may produce
large variations in the long term behavior of the system. In other words,
if done perfectly, the first 15% of the process will lead to proper results
throughout the process. To me, the critical initial part in making
closings seem simple amounts to this: Hire the best and good results will
follow.
Pre-Approval (Buyer) –
Pre-approval and Home Selection (discussed below) can be simultaneous.
Pre-approval answers the question of what a Buyer can afford and confirms this
in writing. A proper approval reflects the lender’s confirmation of three
of the four major factors in issuing firm loan commitment – credit rating, debt
ratios, and down-payment. The last of the four, the value of the home (the
lender’s collateral), is confirmed by an appraisal and condominium
questionnaire, if applicable, after the contract is signed. Just because
the lender offers to lend a maximum amount, does not necessarily mean that the
Buyer will want to do that. The Buyer should be comfortable with the
initial monthly payments to be made, as well as increases in maintenance,
insurance and taxes that will inevitably follow. Leaving room in the
housing budget will allow Buyers to get more enjoyment from the home. On the
other hand, stretching for the bigger home or better neighborhood can make sense
because the Buyer can avoid making multiple moves and the hassle of trading up
in the future. There is no correct answer, but Buyers should consider
their budget and have a safety net.
The key player in the process is the lender, who can make all the difference.
Each lender has different specialties. Make sure your lender knows the
process for your particular situation. Does the lender do FHA loans,
203ks, condominiums, jumbos? Does the lender understand the local
requirements and has actually completed multiple transactions in your county?
Does the lender know how to bring up a credit score if required or even get the
condominium FHA approved? Does the lender have time to for the Buyer and
have a staff that is available to answer questions and respond to issues as they
may arise?
Pre-Approval (Seller) –
Why would I include a pre-approval for the Seller? Sellers do not get
pre-approved. Yes they do! Sellers must be sure that their homes are
saleable. In a condominium, lenders ask the Condominium Association to
complete a questionnaire before approving the loan. The questions on the
form seek confirmation that the Association meets various lending guidelines,
such as FHA or Fannie Mae or Freddie Mac. While these guidelines change
from time to time, the questions asked are fairly consistent. Make sure
the Association meets the guidelines well in advance of listing the unit for
sale. For example, lawsuits, special assessments, low reserves, rights of
first refusal, excessive delinquent assessments, improper budgets (or not
having a written budget), high numbers of renters, low presales in new
developments, improper insurance and large amounts of commercial space can make
approval impossible even if the Buyer has perfect credit and a large
down-payment. In my blog of February 1, 2010, “See Spot Run,” I explained
that in the condominium context, that a Buyer will not get a loan commitment if
the condominium itself does not meet strict lender guidelines. An attorney
can preview the building before listing it to determine if the Association can
meet the lender guidelines.
Also, for condominiums, Sellers should gather the 22.1 Condominium
Disclosures ahead of time. “22.1” is a section of the Condominium
Act that mandates disclosure of basic information to a prospective Buyer.
This includes Association meeting minutes and budgets. Sometimes, the
attorney delays in responding to the request or the Association delays in
issuing the disclosures. This delay can lead to the deal being cancelled
down the line by the Buyer. The Illinois case Nikolopulos vs.
Balourdos holds that the 22.1 disclosure is a contingency of the deal, whether
stated or not, and the purchase has an implied right to terminate based on the
disclosures. Word to the wise Seller - extinguish the
cancellation right by providing the 22.1 disclosures to the Buyer as soon as
possible.
In a house sale, some municipalities require a home inspection to ensure that
no health and safety code violations exist. Sellers should have this
municipal inspection done prior to listing the home, if permitted, or as soon as
possible in the communities that require this inspection. Further, in
Chicago, every single family home and 2 through 5 unit apartment building must
have a Zoning Certification. Sellers should request the Chicago Zoning
Certification on their property as soon as possible. If the real estate
agent does not want to order it at the time of the listing, the Seller should
have their attorney get it right away. I represented a Purchaser on a
property where the MLS listing sheet showed a 4 flat and the Seller’s attorney
even agreed in the attorney review to provide a 4 flat Zoning Certification at
closing, but it turned out that in the last building permit reflected only 2
units – the building was illegally converted by dividing the units in half.
Absent an expensive zoning change or going to a review process, the transaction
could not go forward, and all the effort and expense was wasted on the day of
the closing.
In both homes and condominiums, the appraiser must confirm that the utilities
work. Trying to save money by shutting the utilities off, including gas,
electric and water, will only delay the process. In properties where the
utilities cannot be turned back on because of serious defects (such as cracked
water pipes) that the Buyer will remedy after closing, a special 203k loan (and
FHA loan that has money reserved for repairs) or construction loan may offer a
solution.
Home Selection-
The home selection process begins with identifying the Buyer’s needs and
preferences. It also challenges some assumptions Buyers may have about
features on their “must have” list, the targeted neighborhood, or even the type
of home. A great realtor knows how to counsel Buyers on these factors,
find value, and steer Buyers away from trouble. A great realtor knows
which buildings or homes to exclude and what questions to ask before showing a
listing to make sure the building is mortgageable. For example, a realtor
should know the basic criteria lenders look for such as owner occupancy, special
assessments, retail concentration, and flood zones, among other factors.
Contract Signing-
Getting a contract signed can take rounds and rounds of negotiation.
Often deals can be struck creatively in negotiating closing dates, possession
dates and rent backs, rent to own, seller financing, closing costs contributions
or including extra items such as home warranties, surround sound speakers and
patio furniture. If things seem too complicated or confusing or too good
to be true, an attorney should be consulted before signing the contract.
Also, the Buyer and Seller should be sure that the contract contains an Attorney
Review clause (see contingencies below), so that the transaction can be unwound,
amended, or clarified. The Buyer should check with the lender that these
non-standard contract terms will not interfere with the mortgage approval
process.
As far as price is concerned, Buyers and Sellers both want to make sure the
price is in line with similar properties. If not, the parties will be back
at the bargaining table when the lender cannot get the appraisal to match the
sales price. On the other hand, if the parties are a small percentage away
on price, long term, this amount may not make a real difference, especially if
the Buyer will own the property for the long term or if the property is
otherwise unique.
Contingencies-
The contract generally contains several safety nets for the Buyer. It
is not until each and every one of the contingencies get met or waived, that the
contract can be termed “non-contingent.” Sellers want a “hard”
contract, one without any contingencies while Buyers want an “out” if
circumstances change before closing.
Inspection Contingency. The inspection contingency provides an out for
properties that require maintenance beyond what the Buyer expected.
Generally, the Buyer either waives the inspection contingency because no
material defects exist, cancels the contract based on the inspection as the
items prove too large, or asks for the Seller to make repairs or provide a
credit to repair the defects. The attorneys generally negotiate acceptable
terms, and sometimes the issues are so complex that further specific inspections
may be required. Such inspections include exterior, electric, plumbing and
HVAC. Often the real estate agents get involved to find a solution. It is
often a good idea for a Seller to get a contractor in to repair routine or known
problems before listing the home so that these issues do not lead to a
cancellation. Because a confused mind says no, too many little items may
bother a Buyer to such a point that the Buyer cancels under the inspection
contingency. Sellers must also be mindful that the lender’s appraiser or
the municipality may require repairs even if the Buyer does not require them to
be made, as discussed above.
Attorney Approval. This contingency allows attorney to look at the
contract and the parties’ particular circumstances and make request to for
additional terms, confirm or modify the contract. Attorneys look to
whether the contract was completed properly and whether the tax proration
provision makes sense, among other things. If the attorneys can work out
terms, the contract is approved and the transaction moves forward; otherwise the
contract can be cancelled. Buyers must be sure that the review clause
allows negotiation or cancellation of the contract.
Condominium Disclosures (22.1) In the Pre-Approval Seller section, we dealt
with how important this contingency can be for the transaction to move forward.
Financing Contingency. This contingency allows the Buyer to cancel the
contract if financing is not obtainable within a certain amount of time and
within certain parameters such as down payment and interest rate. Buyers
should alert their attorney if they cannot meet these dates or if issues arise
that are beyond routine. The attorney and the lender should be
communicating from the start as lending issues continue to complicate the
process. If the timeframe for this contingency cannot be met, the Buyer’s
attorney then asks for an extension of the contingency or cancels the
transaction if the issue is insurmountable. Often, the seller will have an
opportunity to select a lender to assist under this contingency.
Sometimes, the first lender selected does not end up to be the lender at the
closing as not all lenders have comfort zones for the specific issue encountered
on a particular transaction. Some lenders shy away from new construction
and others from FHA or co-ops. See the Buyer Pre-approval
section above for other thoughts on this contingency.
Ask the lender about their process and if they are familiar with your
specific deal (FHA, 203k, condominium, co-op, or new construction). You do
not want to scramble at the 11th hour to find a new lender because the first
lender (whether it be a bank or a mortgage broker) was not comfortable with the
project, the Buyer or the type of loan.
Well / Septic / Radon. Depending on your municipality and on the
contract, different certifications may need to be obtained. Well / Septic
tests and Radon test tend to be the most typical. Also verify whether the
property is in a designated flood zone where flood insurance will be required.
Clear Title. The Seller has the obligation to deliver the home free of
title defects and the transaction is contingent on clear title. The
Seller’s attorney typically orders a title commitment from a reputable title
company during the attorney approval process. Waiting until the last
minute to review the title can leave little time to clear up issues on title
like mechanic’s liens or unreleased prior mortgages. Moreover, the lender
needs the title as part of the loan approval process. Problems arise when
the seller does not have enough proceeds from the sale to satisfy all the
payment obligations to fully pay the mortgages, commissions and other expenses,
known as a short sale. The realtor or attorney can make this calculation
on a Net Sheet or Closing Statement to be sure that the transaction will not
result in a short sale. Also, unpaid assessments and special assessments
can be problematic for condominium sales if the seller does not have funds
necessary to pay these obligations at closing.
Timing –
The Inspection and Attorney Approval contingencies usually resolve themselves
at the same time, normally within two weeks of the contract acceptance.
Even though most forms contain a five day limit on the review and inspection,
the attorney’s letter usually contains a request to extend the time until an
agreed rider can be worked out. The times can go longer if an inspection
issue arises that needs further study such as an electrician, plumber, or some
other specialist.
The 22.1 Condominium Disclosures usually comes back from the Association or
the management company quickly, but others take two to four weeks time.
Some delays occur because the management company requires forms to be completed
or even an interview with the purchaser. It would be helpful for the
seller to communicate with the Association ahead of receiving a contract to know
the steps involved, as Associations vary greatly in their procedures.
The Financing Contingency can be met in thirty days for a home closing where
the lender does not delay, the borrower provides all required documentation
(application, tax returns, account information and the like), and the title
company and the lender provide each other necessary information.
Loans get delayed where the condominium does not provide the Condominium
Questionnaire (a form similar to the 22.1 Condominium Disclosures) to the
lender, the appraisal gets delayed or issues exist on title. In most
cases, the loan approval approaches 45 and can take up to 60 days.
Frequently, small Associations do not have written budgets that every lender
requires. The budget must have a line item in it that shows adequate
contributions to a separate reserve account.
It is only once all the contract contingencies above have passed, that a
closing can be scheduled.
Select an attorney that considers all these issues in advance and has systems
in place to ensure their completion. At McCormick Braun Friman, LLC, the real
estate attorneys and paralegals have procedures to ensure that all steps in the
closing process get attended to every time and resources to solve the complex
issues that arise. Moreover, part of our process dedicates itself to
following up with the other professionals to ensure that they are moving towards
the successful fulfillment of their obligations too.
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