Monday, October 23, 2017

Debt Relief May Trigger Tax

The Mortgage Debt Forgiveness Act, originally passed in 2007, was extended three times to protect homeowners from paying income tax on debt that was relieved due to foreclosure, short sales or deed in lieu of foreclosure.  

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The law expired on December 31, 2016 and unless it is extended again, homeowners with debt relief in 2017 may be subject to tax.

A homeowner might feel a sense of relief without the obligation of a delinquent mortgage but just because the payments are no longer due doesn't mean that there isn't another obligation that replaces it. If a lender cancels or forgives debt, a taxpayer must include the cancelled amount in their income for tax purposes depending on the circumstances. The tax significance could be serious.

This previously allowed relief only applied to a taxpayers' acquisition indebtedness of their principal residence which did not include second homes and investment property. The maximum amount was limited to $2 million of mortgage debt forgiveness or $1 million if filing separately.

Due to the serious consequences involved in short sales and foreclosures, it is advised that homeowners faced with this possibility should seek expert advice from their legal and tax professionals.





Monday, October 9, 2017

Risk Rate Relationship

Regardless of what a lender quotes on mortgage rates, the actual rate a borrower pays is based on a number of variables. Lenders determine whether to loan money and at what rate based on the risk involved with the transaction.

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Factors that increase the risk that the loan will be repaid will proportionately increase the interest rate charged to the borrower. If the risk becomes too high, the loan will not be approved.

  • Loan amounts – conventional mortgages above conforming limits as set by Fannie Mae and Freddie Mac are considered jumbo loans and generally have a higher interest rate.
  • FICO score – the lowest interest rate is reserved for the highest score; the lower the score, the higher the rate the borrower will pay.
  • Occupancy – borrowers occupying a home as their principal residence are considered a better loan risk than second homes and investment properties.
  • Loan purpose – purchase transactions generally have the lowest interest rate with refinancing for better rates and terms being priced slightly higher. An even higher rate might be charged for refinancing and taking cash out of the property.
  • Debt-to-Income Ratio – a borrower's monthly liabilities divided by their gross monthly income develops a ratio that helps lenders to assess the borrower's ability to repay the mortgage.
  • Property Type – some types of property are considered higher risk than others which could adversely affect the rate. 
  • Loan-to-value – the lower the percentage of the loan to the appraised value of the property will generally lower the interest rate.

Any combination of these factors could limit a borrower's ability to secure a mortgage at the rate initially quoted. Pre-approval by a trusted mortgage professional can be the best way to know what rate you can expect to pay. Please call for a recommendation of a trusted mortgage professional.










Wednesday, August 23, 2017

Which Value Do You Want?

What your home is worth depends on why you ask the question. It could be one value based on a purchase or sale and an entirely different value for insurance purposes.

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Fair market value is the price a buyer and seller can agree upon assuming both are knowledgeable, willing and unpressured by extraordinary events. This value is generally indicated by a comparable market analysis done by real estate professionals.

Insured value is determined for insurance coverage. Homeowner policies typically have replacement clauses in them and the cost of demolition, new construction and the added complexities of matching existing construction could exceed the cost of new construction.

Investment value is based on the income it can generate during its useful life. This value is dependent on what kind of yield an investor requires to capitalize the value over time. The formula for this is to divide net operating income by the capitalization rate required by the investor.

The assessed value of a home is used to determine the property taxes the owner must pay. This value is determined by the responsible state government agency.

Homeowners are generally more familiar with their home's market value. Since it can be lower than the replacement cost, owners should review the insured value with their property insurance agent periodically. 

There can be a surprising difference in each of these separate values. It is important to know the purpose that it is going to be used for the value.







Friday, July 21, 2017

Assumptions are an Alternative


FHA VA Assumption.pngIn the late 80's, both FHA and VA began requiring buyers to qualify to assume their mortgages. The main reason there haven't been many assumptions in the past 25 years is that interest rates have been steadily going down and if a person has to qualify, they might as well do it on a new loan and get a lower interest rate.

Based on projections by Fannie Mae, Freddie Mac, the MBA and NAR, rates for the second half of 2017 and 2018 are expected to be higher. When interest rates on new mortgages are higher than the rates of assumable FHA and VA mortgages in the recent past, it becomes more advantageous to assume the existing mortgages.

FHA and VA loans originated with lower than current interest rates have great advantages for buyers and sellers.

  1. Interest rate won't change for the qualified buyer
  2. Lower interest rate means lower payments
  3. Lower closing costs than originating a new mortgage
  4. Easier to qualify for an assumption than a new loan
  5. Lower interest rate loans amortize faster than higher ones
  6. Equity grows faster because loan is further along the amortization schedule
  7. Assumable mortgage could make the home more marketable
An Assumption Comparison can help determine the savings and financial benefits of an assumable mortgage with a lower rate.



Tuesday, July 11, 2017

Family & Friends Mortgage

Anytime a lender and borrower can agree on rates and terms, it can be a good match but IRS has specific rules that govern the transaction especially when the parties are family or friends.

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The loan must be done in a business-like manner with a written note specifying the loan amount, interest rate, term and collateral. IRS requires that the mortgage be a recorded lien to allow the interest deduction.

Sometimes, a friends and family situation might have a less than normal interest rate on the mortgage. However, the rate charged in the note is regulated by the minimum applicable federal rate which is published monthly by IRSbased on current Treasury securities. For July 2017, the rate is 2.57% for terms over nine years.

The seller must report the interest paid to them along with the name, address and Social Security number on schedule B when the buyer uses the property as their principal residence.  A mortgage between family and friends can be good for both parties. It may allow the borrower a slightly lower rate without the expenses of a traditional lender while giving the note holder a higher rate than they can earn in available investments. 

Your tax professional can guide the transaction whether you're a buyer or a seller and your real estate professional can help arrange to have the documents drawn and filed.









Thursday, June 29, 2017

Don't Have a CLUE?

If you haven't heard of a CLUE report, it has nothing to do with the table game searching for a murderer. It is a report showing the insurance claims on your home and car for the past five to seven years.

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This database is used by insurance companies to evaluate risks and determine rates. C.L.U.E. stands for Comprehensive Loss Underwriting Exchange. Rates can be increased not only due to legitimate claims but data entry errors also. Sometimes, simply asking a question without filing a claim can be logged as a claim.

For that reason, similar to verifying the accuracy of your credit report, it is important to check out the CLUE report on your home and car. The reports are free and there is a process for correcting mistakes.

An interesting and sometimes costly surprise occurs during the home buying process. The claim experience of the prior seller could impact the price of the premium of the new buyer. For that reason, you can ask for a copy of the CLUE report on the home you're interested in buying prior to writing a contract.









Monday, May 29, 2017

Surely, you remember being a child at an amusement park when after having stood in line with your friends and family, waiting to get on a terrific ride, you discovered the sign that read, "you must be this tall to ride."

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Not only was it disappointing, it was slightly embarrassing. You never want to go through that again.

A remarkably similar situation occurs when people are buying a home. After finding the right home and negotiating the contract, they find out that they don't measure up financially.  It's not something that anyone wants to go through if they have a choice.

Regardless of what you think you know, if you're buying a home with a loan, you need to physically visit with a trusted mortgage professional before you get serious. 

  • You'll find out your credit score which will directly affect the mortgage rate you'll pay. 
  • You might discover blemishes on your credit that possibly can be corrected. 
  • You'll even get a pre-approval letter that you can submit with an offer which could dramatically affect your negotiations in the current competitive market.

Some rides don't turn out to be as good as you thought they were going to be.  A person certainly doesn't want that disappointment with a lender. Contact me for a recommendation of trusted mortgage professional.