PURCHASE (STAGE 2) Flashcards
How the buyer is going to pay for the property
The buyer may be a cash buyer, meaning that they have all of the money
required for the purchase available and do not require a loan. Alternatively, the buyer will need to borrow money from an
institutional lender that will take a mortgage over the prop-erty being purchased as security for the loan.
CASH PURCHASE
If the buyer is a cash buyer, the buyer’s solicitor should carry out checks on any cash that a buyer is contributing towards the purchase in accordance with money laundering requirements. The purpose of these checks is to ensure that proceeds of a crime are not being ‘cleaned’ by entering the banking system
1.Source of Funds
There is no ‘hard and fast’ rule concerning how the check on the source of funds should be carried out, but most frms would want to see that the money had been in a UK-based bank account in the client’s name for the last three to six months.
- Source of Wealth
The more difficult check is one to determine where the client got the money, that is, where the cash came from. Best practice demands that a client proves via documentary evidence where they got the money. Examples of sources of wealth include: an inheritance, a bonus from a job, or a sale of other assets.
What Is a Mortgage?
- a mortgage is an agreement to use property to secure another obligation–usu-ally a loan, the proceeds of which were used to purchase the property.
- The borrower is the person who grants the mortgage and is known as the mortgagor.
- The lender receives the beneft of the mortgage and is known as the mortgagee.
- The mortgage term is generally 25 years but can be for a longer period. If the borrower fails to repay the debt, the mortgagee can use the property to recover the sum lent plus any interest due on the loan amount.
When Do Solicitors Get Involved with
Mortgages?
*Acting for a client selling a property subject to an existing mortgage;
*Acting for a client buying a property and borrowing mon-ey from a lender to do so; or
*Acting for a client seeking to transfer a mortgaged prop-erty from their sole name into joint names with a spouse/partner, or vice versa (transferring a mortgaged property from joint names to one client’s sole name).
Solicitor Can Give Only Generic Advice on mortgage
solicitors can give only generic advice about mortgages, such as advising on the general types of mortgage products. However, if the client requires more specifc advice, the solicitor should de-cline to give this information and should advise the client to see an Independent Financial Adviser.The solicitor can explain the general terms of the offer (length of mortgage, amount borrowed, interest rate, any conditions of the offer) but must not express an opinion as to whether it is a good product or not.
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Types of Mortgage
Repayment mortgage: The borrower repays capital and interest and both capital and interest are included in the monthly repayment amount/.
Interest only mortgage: The borrower repays only inter-est for the term of the loan and then repays the capital sum at the end of the term. For these types of mortgag-es, the borrower must arrange some other form of invest-
ment plan to ensure the capital sum can be repaid at the end of the term.
Endowment mortgage: This is a mortgage combined with life insurance policy. The borrower pays monthly premiums with the intention that the life insurance policy will realise sufcient funds at the end of the mortgage term to repay the loan and provide the borrower with additional funds. This is a risky product and is generally not used because many investments did not produce the
amount expected at the end of the term.
Pension mortgage: This is similar to an endowment mort-gage, but the loan is linked to a personal pension policy instead of a life policy. The proceeds of the pension pol-icy on maturity are used to discharge the loan. This type of product is likely to suit someone who is self-employed.
Sharia compliant mortgage: Specialist lenders ofer Sharia (Islamic law) compliant alternatives to the types of mortgages listed above to address concerns for some Muslim clients about the payment of interest.*
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The Mortgage Offer
- A buyer will usually apply for a mortgage either directly with their lender or via a mortgage broker. Prior to issuing a mortgage ofer,
- the lender will obtain a **mortgage valuation report **to confirm that the property represents good security for the loan and require the buyer to provide evidence that they can aford the mortgage.
- Once satisfied, the lender will issue a mortgage offer detailing the terms of the ofer.
- in a residential transaction, lenders often choose to use the buyer’s solicitor in the transaction. This is, however, unlikely to occur in commercial transactions.
Lender’s Handbook
If the buyer has a lender, their mortgage ofer will be gov-erned by either:
*The UK Finance Mortgage Lender’s Handbook (the ‘Handbook’); or
*The Building Societies Association Mortgage Instructions.
Fraud Prevention
The Handbook details several fraud-prevention mea-sures for the buyer’s solicitor to carry out. For example, the buyer’s solicitor should check:
*That all security documentation is properly signed
(note that it is a best practice for solicitors to witness borrowers’ signatures on documentation);
*That the seller is legally represented, and that funds are to be sent to the seller’s solicitor’s account;
*The details of the property valuation;
*How long the seller has owned the property;
*Whether the price referred to in the mortgage offer is the same as in the contract; and
*How the buyer is funding the rest of the purchase.
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Title Issues
- Take reasonable steps to ensure there are no dis-crepancies between the description of the property as valued by the lender’s valuation, and the title description being examined (valuations sometimes contain errors, such as assuming the property is a freehold when it is actually a long leasehold interest);
- Ensure that all usual and necessary searches and enquiries have been carried out
- Ensure that the lender is named as applicant in the HMLR pre-completion searches;
- Ensure that all searches (for example, pre-contract searches) are not more than six months old at com-pletion, except HMLR priority searches; and
- Not release the mortgage advance unless the solici-tor has sufficient funds to pay all stamp duty land tax and HMLR fees and to perfect the registration of the mortgage. If the solicitor does not have these funds when releasing the mortgage advance, the solicitor accepts responsibility to pay them.
The Mortgage Deed
A legal mortgage must be by deed and 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.
Certifcate of Title
Before a lender will release the mortgage funds, the buy-er’s solicitor must submit a clear Certifcate of Title (‘CoT’) to the lender, confrming that the property has a good and marketable title.
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Purpose of Certificte of Title
*It confrms to the lender that the title is good and marketable; and
*It acts as a request for the release of the mortgage ad-vance.
Do not fall into the trap of thinking that the purpose of the **CoT is merely administrative–it serves a legal function and is much more important than that.
CoT Must Be Submitted Within Timeframe
Required by Lender
- Most lenders will 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 legal completion date in the contract.
Borrowing Money from a Private Source
- Sometimes buyers get some or all of their purchase money from a relative or friend. In such cases, the buyer’s solicitor should carry out the due diligence checks previously men-tioned as to the source of the funds and the source of wealth to help ensure the transaction is not being used to launder money.
- Note that the buyer’s solicitor** should not** act for the buyer and the provider of the private funds due to the risk of a confict of interest arising.
