Last week, I went to settlement on our mortgage refinance. Refinancing was our first step toward converting our residential property to a rental.
Our new interest rate is 5%, which is 0.75% lower than our previous rate and ended up lowering our mortgage payment by $350/mo.
A lower mortgage payment will allow us to set a more competitive monthly rate when we put the property on the market for rent while also netting a profit on the rent after management and maintenance fees.
For the most part, our refinance was a pretty smooth ride for the nearly 90 days it took to complete all of the paperwork and underwriting for the loan. But, there were a few things I needed to set in place and one hurdle that I had to jump in order to complete the transaction.
Many finance loans for primary residence properties require the owner to occupy the home for a certain period of time following a refinance transaction such as ours. Our loan documents indicated a 60-day period following this transaction during which we are required to occupy the property as a primary residence. This is consistent with our planning since I intend to occupy the premise until the move to Mississippi in July.
If you are refinancing with intent on converting the property to a rental, therefore, please ensure that you plan to occupy the home in accordance with your loan’s occupancy requirements.
Power of Attorney for Absent Party
Whenever there are two or more persons on the title of a piece of real estate, all parties may be required to participate in such things as the transfer or finance of the property. For all intents and purposes, refinancing a property is like transferring the property back to yourself under different finance terms. In my case, since I was adding my husband to the title of the home, it was like transferring the property back to myself and also to my husband.
Since he was going to be on the title and since his financial credibility, including income and credit health, would be considered for the loan, he would also be responsible for cosigning all of the paperwork at settlement. But he would be away at deployment on the settlement date, so I needed to have him sign a Power of Attorney giving me the power to sign on his behalf.
Through a Power of Attorney, one party can appoint another party to handle the affairs of the first party in that party’s absence. Powers of Attorney can be general or specific, but are meant to give the appointee the right to sign documents and make decisions on the absent party’s behalf.
The title company had instructed me to produce a Power of Attorney that was specific to this transaction. The form can look something like this. It must be signed by the appointer and sometimes by the appointee agent. A notary public for the state must also notarize the document.
As an attorney, I felt comfortable doing a simple search on Google for a Power of Attorney document specific to real estate transactions. Although you don’t have to be an attorney to execute and produce a Power of Attorney, please bear in mind that different states may have different requirements for the Power of Attorney and it may be advisable for you to speak with an attorney about conforming any Power of Attorney to your state’s requirements. Any person appointing another to be an attorney-in-fact through this document should also keep in mind that your appointment gives that person the power to make potentially important decisions on your behalf and possibly about assets belonging to you.
During the 90 day rate lock-in period, I submitted the requested documents to the title company, including the Power of Attorney. The documents were approved by the title company, and our loan had gone through underwriting successfully. We were ready for closing. They assigned the date and we were ready to go. Once you make it all the way to closing day, you assume that the mortgage lender and the title company have done their due diligence and that everything should be smooth for the taking. Wrong.
On the day of closing, Wells Fargo told us that a state tax lien had appeared on my husband’s credit report and had been there since November 2008. I’m thinking, “if I requested this loan at the beginning of this year, why have they only found this now???” Anyway, they were requiring me to pay the amount of the lien and they would hold it in escrow.
What is escrow? Escrow is an account for holding funds until the consummation or termination of a transaction or until some condition is met.
The lien assessed against my husband was assessed in error. It was actually something that we thought had been taken care of as the state tax lien office acknowledged the error, but it had not been released. Although I was able to have the state lien office fax a letter to our mortgage lender indicating that the lien was in error and would be released, since the lien had not already been released, they insisted I pay the amount of the lien and they would hold it in escrow until the lien is released. The state tax office indicated it would take approximately 5-7 days to release the lien. At that time, I expect the money to be returned to me. At any rate, I made the title company give me something in writing indicating that fact.
If my husband and I had done our own due diligence, we might have discovered the lien on his credit report beforehand and could have resolved it before I applied for the loan. What puzzles me is that this didn’t hurt us at all when getting the terms for the loan and, although it had been there since November 2008, the mortgage lender only found it on closing day. One possibility is that there are three credit reporting agencies and things don’t always hit each one at the same time. So, it may not have been on the credit report reviewed by the mortgage lender when we first requested the loan. I would imagine that if it were on there, they would not have accepted our application.
Fortunately for us, the lien was erroneous. But, these types of blemishes on your credit report can really hurt your credit worthiness. It will be up to my husband now, once the lien is released, to ensure that it has also been removed from all of his credit reports. We now have learned that one should never assume something has been resolved. Always do a follow-up.
Have you refinanced a mortgage? Did you have any hiccups in the process?
MAKE MONEY MONDAYS is a forum to discuss ways in which you can create additional sources of income. I try to focus on particular ideas and steps you can take to create alternative income and passive income sources. I have also begun a series of posts called “Rental Property Conversion.” This series follows my husband and I as we turn our property into a rental property. I will also research and post other useful information in this category. If you like what you see here, please use the orange icon at the top right to receive my content updates by email or RSS reader.