Chapter 7: Buyer's Funding of the Purchase (Stage 2)

Question 1

What are the 2 ways the buyer may pay for the property?

Answer 1

1. Buyer may be a cash buyer - they have all of the money + don’t require a loan.
2. Buyer will need to borrow from an institutional lender that will take a mortgage over the property being purchased as security for the loan.

Question 2

What should the buyer’s solicitor do if the buyer is a cash buyer?

Answer 2

Carry out checks on any cash that a buyer is contributing towards the purchase in accordance with money laundering requirements.

Purpose - to check that the proceeds of crime aren’t being ‘cleaned’ by entering the banking system.

Question 3

What do most firms want to see when checking the source of funds?

Answer 3

That the money had been in a UK-based bank account in the client’s name for the last 3-6 months.

This is to establish the current location of the money.

Question 4

How can solicitors check the source of their client’s wealth?

Answer 4

Best practice demands that a client proves via documentary evidence where they got the money.

Question 5

What is a mortgage?

Answer 5

A mortgage is an agreement to use property to secure another obligation - usually a loan, the proceeds of which were used to purchase the property.

Question 6

How long is a mortgage term?

Answer 6

Generally 25 years, but can be for a longer period.

Question 7

What happens if the borrower fails to repay the debt under a mortgage?

Answer 7

The mortgagee can use the property to recover the sum lent plus any interest due on the loan amount.

This is usually accomplished by taking possession and selling the property, but the mortgagee could also lease the property to raise the funds.

Question 8

What transactions will require a solicitor’s consideration of a lender’s requirements?

Answer 8

1. Acting for a client selling a property subject to an existing mortgage,
2. Acting for a client buying a property and borrowing money from a lender to do so, or
3. Acting for a client seeking to transfer a mortgaged property from their sole name into joint names with a spouse/partner, or vice versa

Question 9

What advice can solicitors give about mortgages?

Answer 9

Can give only generic advice, such as advising on the general types of mortgage products.

However, if the client requires more specific advice, the solicitor should decline to give this information + should advise the client to see an Independent Financial Adviser.

Question 10

What are the different types of mortgage a buyer may apply for and receive?

Answer 10

1. Repayment mortgage
2. Interest only mortgage
3. Endowment mortgage
4. Pension mortgage
5. Sharia compliant mortgage

Question 11

What is a repayment mortgage?

Answer 11

Borrower repays capital and interest and both capital + interest are included in the monthly repayment amount

Question 12

What is an interest only mortgage?

Answer 12

The borrower repays only interest for the term of the loan and then repays the capital sum at the end of the term.

For these types of mortgages, the borrower must arrange some other form of investment plan to ensure the capital sum can be repaid at the end of the term.

Question 13

What is an endowment mortgage?

Answer 13

This is a mortgage combined with life insurance policy.

The borrower pays monthly premiums with the intention that the life insurance policy will realise sufficient funds at the end of the mortgage term to repay the loan + provide the borrower with additional funds.

Risk product + generally not used because many investments didn’t produce the amount expected at the end of the term.

Question 14

What is a pension mortgage?

Answer 14

Similar to an endowment mortgage, but the loan is linked to a personal pension policy instead of a life policy.

The proceeds of the pension policy on maturity are used to discharge the loan.

This type of product is likely to suit someone who is self-employed

Question 15

What is a Sharia compliant mortgage?

Answer 15

Specialist lenders offer Sharia (Islamic law) compliant alternatives to the types of mortgages listed above to address concerns for some Muslim clients about the payment of interest.

Question 16

How does a buyer apply for a mortgage ?

Answer 16

Either directly with their lender or via a mortgage broker

Question 17

What will the lender obtain prior to issuing a mortgage offer?

Answer 17

A mortgage valuation report - to confirm the property represents good security for the loan and require the buyer to provide evidence that they can afford the mortgage.

Question 18

What must a potential lender be satisfied of before giving mortgage offer?

Answer 18

Must be satisfied that the property represents good security for the loan + that the buyer can afford the repayments.

Question 19

Once the lender is satisfied and is willing to make an mortgage offer, what will they do?

Answer 19

The lender will issue a mortgage offer detailing the terms of the offer.

In most residential conveyancing matters, the lender will issue the buyer’s mortgage offer to both the buyer and the buyer’s solicitor.

Question 20

When will lenders often choose to use the buyer’s solicitor in the transaction?

Answer 20

In a residential transaction.
However, this is unlikely to occur in commercial transactions.

Question 21

What will happen if a solicitor is acting for a lender?

Answer 21

The lender will issue a set of instructions explaining what they require the solicitor to do.

Instructions from the lender will be received at the same time that the mortgage offer is issued to the buyer/

Question 22

What will a buyer’s mortgage offer be governed by?

Answer 22

Either:
- The UK Finance Mortgage Lender’s Handbook (the ‘Handbook’), or

• The Building Societies Association Mortgage Instructions.

Question 23

What are the majority of mortgages governed by?

Answer 23

The Handbook, as this has been adopted by most institutional lenders + was prepared in conjunction with the Law Society.

Question 24

What is The Handbook?

Answer 24

It comprises a series of standardised instructions to conveyancing practitioners and variations on these instructions that are required by lenders.

It is a series of ‘best practice’ guidelines on issues that may arise during title investigation + the purchase transaction generally.

Question 25

What fraud-prevention measures does the Handbook detail for the buyer’s solicitor to carry out?

Answer 25

The buyer’s solicitor should check:

1. That all security documentation is properly signed,
2. That the seller is legally represented, and that funds are to be sent to the seller’s solicitor’s account,
3. The details of the property valuation,
4. How long the seller has owned the property,
5. Whether the price referred to in the mortgage offer is the same as in the contract, and
6. How the buyer is funding the rest of the purchase.

Question 26

What must solicitors check when they are acting for both the borrower and lender on a mortgage?

Answer 26

Must ensure they check the relevant lender’s requirements to ensure they are complied with.

Question 27

What instructions does the Handbook contain re the buyer’s solicitor checking title issues?

Answer 27

The solicitor must:

1. Take reasonable steps to ensure there are no discrepancies between the description of the property as valued by the lender’s valuation, and the title description being examined,
2. Ensure that all usual + necessary searches and enquiries have been carried out (and report anything adverse to the lender),
3. Ensure that the lender is named as applicant in the HMLR pre-completion searches,
4. Ensure that all searches are not more than 6 months old at completion, except HMLR priority searches, and
5. Not release the mortgage advance unless the solicitor has sufficient funds to pay all stamp duty land tax + HMLR fees + to perfect the registration of the mortgage.
   - If the solicitor doesn’t have these funds when releasing the mortgage advance, the solicitor accepts responsibility to pay them.

Question 28

How is a legal mortgage created?

Answer 28

Must be created by deed + must be executed by the mortgagor prior to completion.

In practice, this is often done just before exchange of contracts or at the same time as the clients sign the contract.

Question 29

What is needed before a lender will release the mortgage funds?

Answer 29

The buyer’s solicitor must submit a clear Certificate of Title to the lender, confirming that the property has a good and marketable title.

The form of the CoT is usually standard + involves the solicitor confirming a series of statements.

Question 30

What is the purpose of the CoT?

Answer 30

Performs 2 functions:

1. It confirms to the lender that the title is good + marketable, and
2. It acts as a request for the release of the mortgage advance.

Question 31

When must the CoT be submitted to the lender by?

Answer 31

Most lenders specify in the mortgage offer the amount of notice they require from receipt of the CoT to release of the mortgage advance.

The notice required is often 5 or 7 working days.

It is important for the buyer’s solicitor to check the lender’s requirements in the Handbook.

As there can be delays in the banking system regarding the release of funds, many solicitors ask for the completion funds to be sent to them the day before the completion date in the contract.

Question 32

What should the buyer’s solicitor do if a buyer is getting some/all of their purchase money from a relative or friend?

Answer 32

Buyer’s solicitor should carry out the due diligence checks to check source of funds + source of wealth.

Should also report this to the institutional lender if representing them.

If there is a suggestion that the private funds are to be repaid, an institutional lender will usually not be willing to lend on the property.

Question 33

What must the buyer’s solicitor establish re occupiers of the property?

Answer 33

Buyer’s solicitor must establish whether any adult in addition to the mortgagor/s will live at the property on completion.

If so, the lender must be advised, and they will require the non-owning occupier to sign a waiver/consent form to ensure that the occupier doesn’t acquire any rights in the property.

The buyer’s solicitor should not act for the non-owning occupier due to the possibility of a conflict of interest.

Question 34

When does completion of the mortgage take place?

Answer 34

Cannot take place until the purchase has been completed.

Question 35

What is done once the mortgage completes?

Answer 35

The buyer’s solicitor must register the mortgage at HMLR

Question 36

What does it mean to ‘perfect’ the mortgage?

Answer 36

The process of making the application to register the title to the property after completion + ensuring that the lender’s charge is registered as a first legal charge in the Charges Register.

Question 37

What will a search with priority show?

Answer 37

Performed to determine whether there are any charges on the property being purchased + to temporarily prevent any new charges to be registered that would impact the buyer’s rights.

Question 38

What period does the OS1 (or OS2) provide for completing registration of the mortgage for registered land?

Answer 38

The OS1 (or OS2) priority search at HMLR provides a 30-working-day period to complete registration of the mortgage free from any intervening interests

Question 39

How long does the buyer’s solicitor have to complete registration of the mortgage for unregistered land?

Answer 39

If the mortgage completion triggers first registration of the land, the buyer’s solicitor has 2 months to complete the registration of the mortgage free from any intervening interests.

Question 40

What does the buyer’s solicitor have to do when registering the mortgage if the buyer is a company?

Answer 40

Must also register the mortgage at Companies House within 21 days of completion.

This is a strict deadline that must not be missed, otherwise a court application is required to register the charge at Companies House.

The certificate of registration of the mortgage from Companies House must accompany the HMLR application.