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Power of Attorney: When you need it to buy or refinance a home

Peter MillerThe Mortgage Reports Contributor

In this article:

  • What is a power of attorney (POA)?
  • Why would you need one when buying or refinancing a home?
  • Dos and don’ts for using a power of attorney

A POA is a very powerful document that can make buying or refinancing a home possible when you can’t be there yourself to handle all the legalities.

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What is a power of attorney (POA)?

A power of attorney is an important document that sometimes shows up in real estate transactions. It can allow someone else to act in your place to purchase, sell, finance or refinance a home.

“A power of attorney,” says the Florida Bar Association, “is a legal document delegating authority from one person to another. In the document, the maker of the power of attorney (the “principal”) grants the right to act on the maker’s behalf as that person’s agent. What authority is granted depends on the specific language of the power of attorney. A person giving a power of attorney may make it very broad or may limit it to certain specific acts.”

With a POA, you or I can give a lot of authority to an agent. In turn, an “agent” is someone with a “fiduciary” obligation. The term “fiduciary” means a lot of responsibility. An agent must be loyal to the principal, fully account for all money, act with care, maintain confidences, follow instructions, and deal honestly and fairly.

Why would you want a POA when buying or refinancing a home?

That’s a lot of power in a short and simple document, but why would you want one? The answer is that real estate can involve complex transactions and sometimes buyers, sellers and borrowers can’t finish a deal.

Related: Increase buying power by adding a co-buyer

Life happens, and you can’t always put your work, travel plans or family emergencies on the backburner just because of a pending real estate transaction. Here are some examples of why you might need to execute a POA before buying or refinancing:

You have moved away

You’ve moved 1,200 miles to your new home. Your old home is about to close – a month after you’ve moved. If you can’t sign documents, the sale won’t close. Rather than travel back and forth, you use a power of attorney (POA) to close the transaction.

Work commitments

You’re buying a home. You have a 45-day mortgage rate lock. The deadline looms. You are out-of-town for a business meeting. With a power of attorney, your spouse can close for you.

Family concerns

Several years ago your parents gave you a financial power of attorney. One has passed and the other is in a nursing home. You now have the ability to sell their home, access their bank account and sign documents for the surviving parent.

Multiple owners

You bought a property with several people. It’s now time to sell. Only one owner lives near the property. With a power of attorney from each investor, one owner can sell the property.

Dos and don’t for creating a POA

Because an incorrectly drafted POA can be ineffective at best and a financial/personal disaster at worst, you need to know what you’re doing.

Don’t assume that Office Depot can act as your attorney

State rules govern how POAs are written. There is no single, universal form that can work for everyone. The requirements in one state vary from another. While you can download a generic form, it might not meet the requirements of your state.

Don’t give away too much power: limited versus general

It’s possible for a POA to create broad powers for the agent. This is a so-called “general” power of attorney. A limited POA gives the agent enough firepower to complete a certain task but nothing more

It might allow the agent to refinance a home but not sell a car or give away the dog. The POA can also have a limited time frame. It might expire at 10 AM on October 1st.

Do protect yourself with a durable POA

What happens to a POA if the principal becomes sick or dies? Attorney John Reilly, author of The Language of Real Estate, says special rules kick in.

“Normally,” says Reilly, “death of either the principal or attorney-in-fact automatically revokes the power of attorney. Most title companies are extremely cautious with power of documents because of the revocation-by-death rule.”

The solution? Use a durable power of attorney. It remains in effect even after a principal becomes incapacitated.

Do make sure that you have the right to create a POA

It might seem that everyone has the right to create a POA. Not so. Principals must have the “capacity” to sign legal documents. Generally, this means that someone under age 18 cannot create a power of attorney.

In addition, the person creating a POA must legally have the mental capacity to manage their own affairs effectively. Habitual drunkards are out. The insane cannot sign. The senile cannot authorize a power of attorney. A corporate officer may not be able to create a power of attorney without adequate authority.

Related: How to buy property with a boyfriend, girlfriend, partner or friend

Don’t assume that a POA is always accepted

The Florida Bar points out that, “Third parties do not want liability for the improper use of the document. Some third parties refuse to honor powers of attorney because they believe they are protecting the principal from possible unscrupulous conduct. If your power of attorney is refused, talk with your attorney.”

Avoid surprises. What requirements do lenders and closing agents require with a POA? If you are in one state and the closing is in another, ask how that will impact a POA.

Creating a POA

Yes, you can download POA forms. Is that a good idea? Will your form be accepted by a closing agent? Is it right for your jurisdiction? Will you be inadvertently giving someone more rights than you planned? Or creating something that can’t be legally used in your state?

Painting a room can be a do-it-yourself project. Writing a power of attorney is not. Because a POA is a potentially powerful instrument, you want it properly written. A local attorney or legal clinic can provide the advice needed to protect your interests, whether you are a principal or agent.

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