Answers to Home Buying Legal and Finance Questions

Q. We are purchasing a house out of state in Arizona, in a popular vacation spot. We will be visiting the area and staying in the home from time to time, but we will also be renting it out for most of the year. We know there is a big difference in the type of loan we can get for a second home as opposed to an investment property.

My question is, do you think that this would qualify as a second home? Does the fact that we are renting it out automatically make it an investment property? If so, where is the line drawn? How much of the year would we have to not be renting the property for it to pass as a second vacation home?

A. If you show that there is a good distance between that home and your current home, as well as show that it is a vacation area, beach, lakefront or other attraction, you'll be fine. Renting it out isn't a factor, just don't mention it since that isn't the purpose for buying it. You never occupy investment property, but you do occupy a vacation home from time to time.

Q. I really need help on writing up a purchase agreement, and info on how to use a "gift of equity" to cover costs. 6 percent is the max I believe, but it should be enough to cover closing costs, appraisal, etc. This is a purchase from a relative, who is going to be leery on everything, so I would like to keep it as simple as possible, but still legal and binding.

The bank that I am pre-approved through says they cannot help me with this because of some legality issue. I don't want to purchase some off the shelf one from an office store because I think it will be too vague, or simply not fitting for this situation. I am hoping to have the gift of equity squared away at the same time as the purchase agreement, preferably the same document if I can.

A. Sellers are to pay buyers closing costs up to 6 percent of the purchase price. If this is what you are doing, then the statement should be added on a standard purchase and sale agreement. Use standard forms or have an attorney write them.

Q. I signed a purchase agreement with a builder and put down $5000 earnest money. At this point, they have just finished framing the house. Now, I have changed my mind about building the house and would like to back out. The only clause I could see in the purchase agreement about the buyer defaulting reads, "If you default, we may end this agreement and retain all payments made by you under this agreement as liquidated damages, or exercise all other legal or equitable rights." At this point, I am past caring about the earnest money, especially since I have just changed my mind. What does "all other legal or equitable rights" mean exactly? Isn't that what the earnest money is for, to cover any costs that they will incur?

A. Unless you're very experienced in buying and selling houses, or contracting for them to be built, it's always a good idea to have an attorney review each document before you sign it. In this case, he would have assured that liquidated damages was the maximum, and possibly advised you to put less money down. The following isn't so much for you as for anyone else who might stumble over it before going forward with a real estate contract:

Every paper that you will sign throughout the building/buying process was drawn by an attorney who was working for someone else. It's a good idea to have someone looking out for your interests.

Unless your house was something really strange and out of the ordinary it's unlikely that the cost of converting it to something more mainstream would be any more than $5K, in which case the builder would've wanted much more money from you before proceeding. They don't like to risk their own money too far out of the mainstream.

A lot also depends upon the type of house or development. If it's a developer financed tract development, you probably won't get sued. If it's a custom home on your own lot, call your lawyer.

The typical damages you will encounter in breach of contract litigation where new construction is involved are: (1) carry cost (e.g. interest the builder pays on a loan to finish the project and carry it until it sells to someone else); (2) costs to resell the property (e.g. realtor commissions and other extra marketing); (3) lost profit (shortfall between what you agreed to pay and the price at which the builder ultimately sells the project); and (4) attorneys fees.

In a hot market, it is unlikely that you will be paying "lost profits." Also, some builders set their earnest money price at their "carry cost" for the anticipated length of construction (like 5-6 months for a tract home). Furthermore, depending upon the type of home (custom vs. tract), the likelihood that you'll get sued varies. You see people sued over custom homes more frequently, but in tract projects you don't see suits that often, if for no other reason than the tract house will probably be sold within a couple of weeks.

Q. What is the difference between a quitclaim deed and a warranty deed? My ex-husband is taking his name off the title of our home and I will be re-financing with my current husband.

A. A quitclaim deed is one where the grantor passes any title they may have in a property, without professing that they have any title in it. As you are going to refinance it should work OK, however, you might want to check with the new lender to make sure. By the way, if you were not refinancing, it would not give your ex any protection, as it would only take him off the deed, not off the loan. Many times people make this mistake, signing a quitclaim when they divorce, then the spouse in the house defaults on the loan and the lender goes after the one who signed the quitclaim.

Q. I have heard stories about buyers showing up at closing only to find out they have been denied a mortgage loan. The reasons for the denial usually have to do with the buyer opening up new lines of credit or using their existing credit cards to furnish the new house. Is this common? I am petrified that I'll be denied a mortgage loan at my upcoming closing. I haven't so much as touched any of my credit cards since I received my initial pre-qualification, but I remain nervous. Do lenders normally give buyers a definite confirmation that a loan will be extended prior to closing or do I have to remain frantic until I sign that last piece of paperwork at closing? I do not want to show up and be humiliated at closing.

A. That sounds like another "urban myth." If a mortgage loan has been denied, no closing documents package or the loan funds will be transferred to the closing attorney or title company, so no closing would ever even be finally scheduled. If your closing is scheduled and the package and funds are there, do not worry about anything more than getting writer's cramp signing all of it.

Q. About two months ago, I entered into a contract for a two-bedroom condo. Everything went smoothly, had great credit and good income but at the last minute I kind of didn't have a job. The bank denied the loan due to insufficient income information. I requested for my down payment (10K) and it looks like the seller will be taking me to court. It looks like they called my ex company and someone mistakenly told them I was still working. Now, they are taking me to court and putting me on default so that I can prove to them that I no longer work for the company. Can the seller do this? I would think that once they have the loan denial, I can request for my 10 percent down payment, but now it looks like they want to keep it. What are my chances of getting my money back given the fact that I no longer work for the company and will most likely find new employment?

A. Get a lawyer who knows what he is doing. If you had a loan provision in the contract, you should be able to recover all of your earnest money due to the loan denial. Just get a "loan denial" statement form from your lender. You still haven't confirmed that your purchase offer had a financing contingency. If it did, then you have absolutely nothing to worry about, letters of commitment mean nothing, and these people are trying to scam you based on nothing more than a clerical error by the bank. They're not entitled to a dime of your earnest money. In addition, the "maintenance fees" are a scam. These people should be reported to the state licensing board.

Visit our Community Forums for more answers to your real estate questions.