Not allowed to put money in escrow for repairs?!!? (real estate, insurance)

[icibiu]

I also posted this on the mortgage forum but figured I'd also ask my Jersey peeps from some advice:

We were supposed to close on our house today--SUPPOSED TO. But late yesterday we get a call from our attorney who explains there is a problem, she's trying to blame it on the bank but I think it's her fault, anyway here is the deal:

During inspection the septic failed so we went back and requested that the buyer replace the system, no problem. Our original date of Oct 15th got pushed back because replacing a septic is a big job between designing a system getting it approved blah blah blah. Last week everything was finally approved by the town so a closing date was set for today. The work wouldn't be done by then so we requested money to be escrowed to cover the repairs. The quote was for 11K our lawyer requested 40K, seller agreed with no problem. WELL last night we find out that the FHA has some regulations about no money being witheld from the seller after closing and since we are having all this money escrowed the bank won't release the funds.

WHAT?!?!!?!?!?!??

This is my first time buying but from what i understand putting money in escrow to complete repairs is something pretty common. Does anybody know anything about this? She said it was specific to FHA. Or so you think she's using some BS excuse to cover up her own blunder? (I wouldn't be surprised, she's terrible)

This is such a PITA, beside the obvious desire to get our house already this is going to cost us some $$$. Our commitment letter expires tomorrow so now we have to pay for an extension, our stuff is in storage and we will have to pay another full month if our stuff is not out this Sunday and we are living out of suit cases 3 people in one tiny bedroom!!! The septic won't be done for another 3 weeks!! If this is her fault do I have any recourse? Can we take it out of her fee?

[CaptainNJ]

i dont know much about this but one thing that my mortgage company rep said is that in order to do the mortgage they want everything done. no credits, money in escrow to complete anything, etc.

[icibiu]

That's pretty much what we are hearing from our lawyer, i'm just PO'd because why NOW? If these are the rules and your SOOOO busy with closings every single day that you can't bother to return my calls why didn't you know about this before? I just feel like she really dropped the ball. She's costing both us AND the seller a ton of money (i'm pretty sure the seller wasn't counting on making another mortgage payment on this house) I hired this woman for her so called "expertise" with real estate transactions but I feel like she's driving blind. Shoot I could have skipped the lawyer and run into this problem myself but atleast I wouldn't be out the $$$ for legal fees!

(I AM SO PO'D RIGHT NOW!)

[blackandproud]

Originally Posted by icibiu

I also posted this on the mortgage forum but figured I'd also ask my Jersey peeps from some advice:

We were supposed to close on our house today--SUPPOSED TO. But late yesterday we get a call from our attorney who explains there is a problem, she's trying to blame it on the bank but I think it's her fault, anyway here is the deal:

During inspection the septic failed so we went back and requested that the buyer replace the system, no problem. Our original date of Oct 15th got pushed back because replacing a septic is a big job between designing a system getting it approved blah blah blah. Last week everything was finally approved by the town so a closing date was set for today. The work wouldn't be done by then so we requested money to be escrowed to cover the repairs. The quote was for 11K our lawyer requested 40K, seller agreed with no problem. WELL last night we find out that the FHA has some regulations about no money being witheld from the seller after closing and since we are having all this money escrowed the bank won't release the funds.

WHAT?!?!!?!?!?!??

This is my first time buying but from what i understand putting money in escrow to complete repairs is something pretty common. Does anybody know anything about this? She said it was specific to FHA. Or so you think she's using some BS excuse to cover up her own blunder? (I wouldn't be surprised, she's terrible)

This is such a PITA, beside the obvious desire to get our house already this is going to cost us some $$$. Our commitment letter expires tomorrow so now we have to pay for an extension, our stuff is in storage and we will have to pay another full month if our stuff is not out this Sunday and we are living out of suit cases 3 people in one tiny bedroom!!! The septic won't be done for another 3 weeks!! If this is her fault do I have any recourse? Can we take it out of her fee?

FHA is kind of sticky, there are things that they require to be done before closing.

Will they allow a drop in the price of the home and you can then finance the repairs in your mortgage? in other words if the asking price wast $340K, they can drop it down to $300K, but you will still finance the $340 with the bank with the extra going for repairs? Just a thought.

I'm going through something similar, but i'm doing a conventional mortgage.

[armx]

ici:

Regular FHA (not 203K) appraisals are based on a move-in condition (with all repairs done - basis) therefore, it was erroneous to set up a date for settlement without having the repairs (in this case a working septic system) completed. IT IS NOT A NEW RULE. Most lenders (conventional) do not like to disburse the mortgage money without completed work.

Whoever, arranged for that date is the one that dropped the ball either your attorney or the agent (I suspect you don't have an agent).

You may have a recourse against the attorney but it will be a slow process unless she is a self respecting person and admits that she should have known that for FHA money to be released the repairs had to be complete.

[icibiu]

armx, thanks so much for your reply! I was hoping some one in the business would have some insight.

We do have an agent that we are working with should he have caught this?

My initial reaction is to be mad at the lawyer, she has been awful to deal with throughout this entire process very unresponsive, impossible to get in touch with etc. This whole time i've felt like just she wasn't very focused on us. It really annoys me that I am paying a lawyer good money who specializes in real estate and then they let things fall through the cracks that should have been aparrent. THEN to try and sweet talk me and blame it on everyone else and "new" regulations makes me even madder! I'm not an idoit lady, do you think I wasn't going to look into this? She's lying to my face and taking me for a fool.

[South Jersey Styx]

Dear icbiu,

If your lawyer was an expert in FHA Loans and real estate then she should have known this. Are you speaking directly, one-to-one with your Lenders? I am in a similar situation, buying a historic property with an FHA Loan. The rules about putting/not putting monies in escrow differs depending on what kind of repairs are needed. For example, FHA Loans will not allow it on major items--in my case, re-wrapping or abatement of asbestos-lined pipes. The asbestos-pipe system is grandfathered in, meaning this is a system common for the time the house was built (1800s) and does not have to be replaced by newer pipe systems in order to clear with FHA. However, the wrapping of pipes in asbestos was the problem. It fell under an environmental-standard and could not be covered by monies in escrow. IOW, (1) the Seller needed to repair it before Settlement, or (2) the contract would be cancelled.

One way around this is the FHA 203k Rehab Loan. This loan allows someone to have deficiencies that can be repaired *after* Settlement. Your Lender does an inspection, you and Lender gather estimates for the costs of repair, these costs go into escrow and you go to Closing. The costs of repair are built into the amount you borrow so the Buyer doesn't have to cough up extra cash for the repairs.

Also, there are two types of FHA203k's: (1) streamline (repairs under $35,000), or (2) regular (repairs over $35,000).

Your Lender, if they are experienced in all this, can change your loan from an FHA to an FHA 203k Rehab Loan. My Lender says it just "requires more paperwork." But some Lenders are not trained in this and some will refuse to do it. Luckily my Lender can do any kind of FHA loan--rehab or not.

Your Lender should have told you all this as well as this attorney. Remember, your Lender is only a liaison between a government-backed loan program (FHA) and something of value (the house you're looking at). They aren't going to give money away to a house with deficiencies, especially one with an environmental/health hazard.

I know you're mad right now but chalk this up to a learning experience. If this house doesn't work out for you, there are other fish in the sea. I am looking at my third historic house right now (I withdrew my contract from the asbestos-one because the Seller was uncooperative and a jerk). I should be going to Closing in early December.

BTW, if you don't like your Lender, shop around. Keep lines of communication open and keep them updated on everything going on with your house--repairs, inspections, etc. Give them copies of everything they need ASAP. They should be working for you and protecting you and your interests. Best of luck--I know you'll find a home soon!

[icibiu]

Ok so I spoke with the attorney again and she said its not that this is a new regulation its that the lender is not supposed to know about it (apparently before it could be swept under the rug) but since the attorney mentioned it somewhere in the paperwork the bank offically knew about it and so they couldn't move forward AND she felt it was unethical not to tell them. They are starting the work on the septic this Monday and it will hopefully be done by friday unless they run into major issues (there is a lot of rock in the ground). Luckily the seller is a total sweetheart and has no mortgage (she's been there 30 years) so we are moving in next weekend under a use and occupancy agreement. We only have to pay the taxes & insurance prorated by the day. Downside is we can't start any of the work (refinishing floors, taking down wall paper etc.) but at least we can start getting in there!

I still would never ever ever ever use this lawyer again or wish her upon anyone else!

[South Jersey Styx]

Originally Posted by icibiu

Ok so I spoke with the attorney again and she said its not that this is a new regulation its that the lender is not supposed to know about it (apparently before it could be swept under the rug) but since the attorney mentioned it somewhere in the paperwork the bank offically knew about it and so they couldn't move forward AND she felt it was unethical not to tell them.

This lawyer is an idiot. Lenders these days are being very strict and watching *everything*. The days for lawyers and listing agents trying to fool banks is over. Kudos to your Lender for catching this and making sure it is remedied. You've had a slight delay but will be worth the wait.Best of luck to you in your new home!

[armx]

S J S :

Good job explaining about the 203K program ... but at this stage it would not be quicker to shift ici into that program.....Still .... helpful explanation for somebody else who would benefit before getting into similar trouble.

ici:

At least they were able to get you in by occupying prior to settlement, but you should try to make everybody making money on your transaction to contribute to make you whole (financially)