March 24, 2000

What happens when mistakes are made

By TOM KELLY
The Real Estate Advisor

Timing is often crucial in the purchase of real estate. The same can be said of the escrow and closing process: Funds must be disbursed on a specific date so that the seller, previous lender and any other party owed money in the deal can be on their way.

The payoff figures the lender supplies to the escrow agent are critical. When a loan is refinanced, the amount still owing on the old loan usually is faxed to the escrow agent. Once the old loan is paid off, the "lien" is removed from the title, clearing the way for the new loan and lien to be put in place.

But who is responsible when an incorrect payoff figure is reported or paid? A problem, still unresolved, surfaced for one of our readers recently when a lender called, after the refinance was completed, and said $3,000 was still owing. The escrow company says the lender is at fault, and vice versa.

Most escrow agents say that they only work off the numbers given to them in writing by the lender. Good escrow agents do not take verbal figures. If the escrow actually paid the wrong amount, it would most likely be up to the escrow agent to resolve the problem.

If the buyer really finds an error in the closing papers, they should go back and compare those costs with the ones they received on their good faith estimate,’’ said Chicago Title’s Jodie Schimke.

A lot of times, there are some FHA or VA costs that are not fully explained at the beginning that do show up at closing. It’s common, but not comfortable.’’

Other title officers concur that government loans can be confusing on interest issues. One said banks often get amnesia at payoff time and have to be pestered into releasing payoff figures. However, a $3,000 question would take a major error - most say discrepancies are over one month’s interest payment.

Refinancers would certainly differ from new-purchase customers. Schimke said that some new buyers would close anyway - regardless of a closing question - because of the competition for homes in many areas.

The reality is that some buyers will question a closing number, yet go ahead and close anyway,’’ Schimke said. They simply don’t want to lose the house. That’s because they fear if they don’t close, that somebody else is right behind them with an offer that might be even $1,500 higher than theirs.’’

But a refinance? One possible way for $3,000 to fall through the cracks would belate spending by the consumer. Many home-equity loans now come in the form of a checkbook line-of-credit. The borrower simply writes a check similar to a common checking-account check to borrow money.

These lines of credit need to be totaled and repaid to the respective lender at refinance time. If a check were written at about the same time escrow payoff figures were requested, that late check could cause a major problem.

Escrow is an arrangement in which money and/or documents are held by a third party on behalf of the buyer and seller. The purpose of escrow is to ensure that all parties to the deal are satisfied.

It sees that the seller receives the purchase price, the buyer receives clear title to the property, and the lender gets the proper security interest in the property.

Escrow may be "opened" by either buyer or seller and typically occurs when the real-estate agent delivers a copy of the purchase and sale agreement to the escrow agent. Escrow can technically open when the lender delivers a copy of the loan commitment to the escrow agent.

An escrow agent may be a bank, some other financial institution, a title insurance company, an independent escrow firm, a mortgage broker or an attorney.

The escrow agent orders title insurance and works to clear any defects or encumbrances from the title, reviews the purchase-and-sale agreement and loan commitment, collects the funds necessary to close and prepares settlement or closing documents.

The escrow fee is one of the closing costs. It is often split between buyer and seller. The escrow fee on a $150,000 home sale is approximately $800 (commonly split $400 apiece between buyer and seller), plus tax. The higher the sales price, the higher the escrow fee.

Closing is the consummation of the transaction - the seller delivers title to the buyer in exchange for the purchase price. The term "closing date" refers to the legal closing date, when the documents transferring title from seller to the buyer are delivered and recorded.

Make sure you get clear title to your property. If you a have a line of credit, stop spending at least 10 days before closing. If the payoffs were improperly reported or paid, make certain you were not in the middle of it. It could take an attorney to sort it all out.

Previous columns:

• Microsoft promises home loan revolution, 03-17-2000
• Economist for NAR dusts off his crystal ball, 03-10-2000
• How to let someone rescue your deal, 02-25-2000
• Options for stock-rich, cash-poor homebuyers, 02-18-2000
• What lies ahead for real estate?, 02-11-2000
• Selling that vacation property, 02-04-2000
• Definition of fixture isn't fixed, 01-28-2000
• New forces changing housing market, 01-21-2000