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Illegal Addition Means Buyers Risk Inspection, Hefty Fines


Question: We're considering buying a lovely house in the neighborhood we want. There's just one little problem: The family room and a bathroom were added in 1991 without a building permit. The seller and Realtor clearly disclosed this to us. The Realtor says "Don't worry. I've never seen the city cause any trouble for additions made without permits." What is the risk if we buy this house?

Answer: If the city should learn of the illegal addition, I've seen inspectors make owners tear out the wallboard so they can check the wiring and plumbing. Also, the homeowner must then get a building permit and pay a penalty fee. Most appraisers, if they learn an addition was built without a building permit, will heavily discount the value of the addition. On the other hand, I know of many illegal additions built many years ago that haven't caused any problems.

I can't advise you to proceed with that purchase but, if you do, discount your purchase price to reflect the situation. Of course, make your offer contingent on obtaining the specific mortgage you need.

Federal Law Mandates Appraisal for Borrower

Q: In a recent reply about providing appraisal copies to borrowers, you responded as if the lender has a choice in providing an appraisal copy to the borrower.

The Federal Reverse Bank's Regulation B, called the Equal Credit Opportunity Act, section 202.5, mandates that a lender provide a copy of the appraisal at no additional cost or provide a form to the borrower for requesting a copy of the appraisal. The appraisal request should go to the lender, not the appraiser.

A: Thank you for clarifying the basis for the lender's obligation to provide a copy of the appraisal to the borrower.

Celebrate, But Don't Really Burn Mortgage

Q: In a few months we will make our last mortgage payment after 25 years. Is it OK to burn the mortgage? What should we do to be certain our title is clear?

A: When you make your last mortgage payment, attach a letter notifying the lender that this is your final payment. Ask the lender to clear the mortgage from your home's title and notify you within 30 days. If you have a mortgage, the lender will record a Satisfaction of Mortgage. If you have a deed of trust, the lender will record a Deed of Reconveyance. If you are buying on a land contract (also called a contract for deed, agreement of sale, installment land sale and other names), the lender (seller) will give you the deed to the property.

Follow up in 30 days if you haven't received proof that the lender recorded the proper document. This is very, very important. Because they have little financial incentive, many lenders "forget" to promptly record the paperwork to clear your title.

Finally, do not burn the mortgage. It's OK if you have a symbolic mortgage burning party. But save all your mortgage paperwork just in case you need it later.

Homes' Square Footage Doesn't Always Add Up

Q: How is the square footage of a house determined? Is it the size of the rooms on the first and second floors only? Are the garage, basement and attic included?

A: Standard appraisal practice is to measure the exterior of the home's living areas on all levels, excluding the garage, basement and attic. When I refinanced my house in 1998, several appraisers evaluated my home. All arrived at different square footage for the living areas. But the differences were only about 170 square feet.

In a recent court decision (Furla vs. Jon Douglas Co.), the seller and listing agent represented a home to have about 20% more square footage than it actually did.

But three appraisers who later measured the square footage arrived at three different calculations. The seller and listing agent were held liable for misrepresentation.

As a result of this important case, smart real estate agents and multiple listing services now word their disclaimers: "Information deemed reliable but not verified."

Value, Not Duration, Is Key to Insurance Policy

Q: Is there a minimum length of time a private mortgage insurance borrower must pay premiums? Will the lender drop the insurance if, after six months, we pay down our mortgage to 80% of our home's market value? Someone told me we must keep our insurance for two years. Is that true? Also, what is the minimum home down payment today? Can the down payment be 100% gift money?

A: Many lenders, including giants Fannie Mae and Freddie Mac, have guidelines allowing you to drop private mortgage insurance after two years of on-time monthly mortgage payments, if the loan-to-value ratio drops below 80%.

However, if you pay down your mortgage below 80% loan-to-value in less than two years, there is no legal reason the lender cannot drop the insurance requirement, because it is no longer needed.

As for minimum down payments, VA home loans require nothing down. FHA requires about 3% down; private mortgage insurance requires 5% to 10% down; and the new Fannie Mae Flex 97 loan requires only 3% down. Fannie Mae says the 3% can be a gift or it can be borrowed.

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