This past year saw the residential sale market to be fairly slow, but refinancing has been hot. With the popularity of the Home Affordable Refinance Program (HARP), some of you may have already found yourself taking advantage of today's low interest rates, while many of you may be wondering whether refinancing makes sense for you. If refinancing is on your mind, reach out to a trusted mortgage professional to explore whether you are in a position to benefit from the current low interest rates. In some cases, you may be able to reduce your interest rate considerably and knock years off of your existing mortgage at the same time. 

As always when you seek financing, your income, credit score and the appraised value of your home will remain key factors. It is important to know, however, that there is more to the application process than just your direct qualifications with the lender: the state of your "title" is also significant.

When you apply for a mortgage, the lender will require an insurance policy, known as a loan policy, to be issued at closing. This policy is different than the policy obtained when you purchase a home (the owners' policy) and it insures that the new mortgage will be in a first lien position on the property. Thus, when a refinance application is submitted, the lender will require a title search, and it is at this stage where issues, or hiccups, may arise which can surprise and inconvenience a borrower.

The title search discloses any outstanding mortgages or lines of credit against the property, and any judgments or liens against the property. Any open mortgages must be paid off, or subordinated (i.e. moved to second in line to the new mortgage), and any open judgments must be paid off at closing. The most common hiccup occurs when a borrower has paid off an old mortgage, but a satisfaction of mortgage was never recorded in the County Clerk's office. Thus, the borrower may know the debt to be satisfied, but he will have to prove it to the title company in order to refinance.

At this point, a borrower may be forced to sift through mounds of old paperwork in order to furnish proof that the debt was satisfied. In some cases, a zero balance or "account closed" marker on a credit report may not be enough for the title company. As a result, addressing open mortgages will often prove to be a burdensome task for a borrower. This task may also be aggravated if prior lenders or title companies are no longer in business and the borrower has no entity to go to with his request for a duplicate satisfaction of mortgage. Thus, a savvy borrower should always inquire as to whether a lender, after confirming that a debt has been satisfied, has forwarded the proper documentation (either a satisfaction of mortgage or a release of lien) to the County Clerk's office for recording. In addition, it is wise to request that a copy of same be forwarded to you, for your own records and safe-keeping, so that, if faced with the inconvenience of open mortgages, you will be in a position to furnish the appropriate documentation to the title company upon their request.

We are often asked about dealing with customers through sales agents.  In New York, basic Agency Law provides that an agent cannot be held responsible for the debt of a disclosed principal, unless the agent specifically agrees to become liable, either jointly or independently. That agreement must be in writing prior to the transaction.  We always recommend a Credit Application be obtained from the customer, regardless of whether the order is placed through an agent.

The best thing a creditor/vendor can do is to get an agreement from the principal of the customer where they become independently responsible for payment of the bill in the event that the debtor business does not pay.  We have had clients tell us that any Credit Application would "get in the way" or "will kill my business".

Think about the percentage of your accounts that go to collections.  If your delinquency rate is relatively low, requiring a Credit Application might not make statistical sense.  If your receivables figure is high from a certain customer, you should take all steps to protect yourself.  If you aren't getting paid, you won't miss the business and you will actually save yourself time, money and aggravation.

Ultimately, the creditor/vendor has to make an intelligent business decision on whether to require a guaranty agreement prior to doing work for a particular sales agent or customer.   If you do require one, include provisions for finance charges and for the recovery of collection fees in the event of a default.  That will take the financial sting out of referral to an attorney later.